Business Marketing
Management: B2B
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Business Marketing
Management: B2B
10 e
MICHAEL D. HUTT
Arizona State University
•
THOMAS W. SPEH
Miami University
Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States
Business Marketing Management:
B2B, Tenth Edition
Michael D. Hutt and Thomas W. Speh
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Jack W. Calhoun
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To Rita and to Sara, and in memory of Michele
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PREFACE
Special challenges and opportunities confront the marketer who intends to serve the
needs of organizations rather than households. Business-to-business customers represent a lucrative and complex market worthy of separate analysis. A growing number
of collegiate schools of business in the United States, Canada, and Europe have added
industrial or business marketing to their curricula. In addition, a large and growing
network of scholars in the United States and Europe is actively engaged in research
to advance theory and practice in the business marketing field. Both the breadth and
quality of this research has increased markedly during the past decade.
The rising importance of the field can be demonstrated by several factors. First, because more than half of all business school graduates enter firms that compete in business markets, a comprehensive treatment of business marketing management appears to
be particularly appropriate. The business marketing course provides an ideal platform
to deepen a student’s knowledge of the competitive realities of the global marketplace,
customer relationship management, cross-functional decision-making processes, supply
chain management, e-commerce, and related areas. Such core content areas strike a responsive chord with corporate recruiters and squarely address key educational priorities
established by the American Assembly of Collegiate Schools of Business (AACSB).
Second, the business marketing course provides a perfect vehicle for examining the
special features of high-technology markets and for isolating the unique challenges that
confront the marketing strategist in this arena. High-tech markets represent a rapidly
growing and dynamic sector of the world economy and a fiercely competitive global battleground but often receive only modest attention in the traditional marketing curriculum.
Electronic (e) commerce also falls squarely into the domain of the business market. In
fact, the opportunity for e-commerce in the business-to-business market is estimated to be
several times larger than the opportunity that exists in the business-to-consumer market.
Third, the Institute for the Study of Business Markets (ISBM) at Pennsylvania State
University has provided important impetus to research in the area. ISBM has become a
major information resource for researchers and practitioners and has assumed an active
role in stimulating and supporting research on substantive business marketing issues.
In turn, the number of research studies centered on the business-to-business domain
has significantly expanded in recent years, and specialized journals in the area attract a
steady stream of submissions. The hard work, multiyear commitments, and leadership
of the editors of these journals are worthy of note: Journal of Business-to-Business Marketing, J. David Lichtenthal, Baruch College; Journal of Business & Industrial Marketing,
Wesley J. Johnston, Georgia State University; and Industrial Marketing Management,
Peter LaPlaca, University of Connecticut.
Three objectives guided the development of this edition:
1. To highlight the similarities between consumer-goods and business-to-business
marketing and to explore in depth the points of departure. Particular attention is
given to market analysis, organizational buying behavior, customer relationship
management, supply chain management, and the ensuing adjustments required
in the marketing strategy elements used to reach organizational customers.
2. To present a managerial rather than a descriptive treatment of business
marketing. Whereas some descriptive material is required to convey the
vii
viii
Preface
dynamic nature of the business marketing environment, the relevance of the
material is linked to marketing strategy decision making.
3. To integrate the growing body of literature into a strategic treatment of business
marketing. In this text, relevant work is drawn from organizational buying
behavior, procurement, organizational behavior, supply chain management,
strategic management, and the behavioral sciences, as well as from specialized
studies of business marketing strategy components.
The book is structured to provide a complete and timely treatment of business
marketing while minimizing the degree of overlap with other courses in the marketing
curriculum. A basic marketing principles course (or relevant managerial experience)
provides the needed background for this text.
New to This Edition
Although the basic objectives, approach, and style of earlier editions have been maintained, several changes and additions have been made that reflect both the growing
body of literature and the emerging trends in business marketing practice. Specifically,
the following themes and distinctive features are incorporated into the tenth edition:
• Relationship Marketing Strategies: new and expanded coverage of the drivers
of relationship marketing effectiveness and the financial impact of relationship
marketing programs.
• Strategic Alliances: a timely and richly illustrated discussion of the determinants and social ingredients of alliance success.
• Strong B2B Brands: specific steps for building and managing a profitable B2B
brand.
• Marketing Performance Measurement: a timely treatment of specific metrics
for measuring the impact of marketing strategy decisions on firm performance.
• A Value-Based Approach for Pricing: a timely description of a framework for
identifying and measuring value by customer segment.
• A Customer-Centered Approach to Channel Design: a fresh approach for
designing channels from the bottom up, rather than the top down.
• Other new topics of interest: the new edition includes expanded treatment of
customer experience management, corporate entrepreneurship, strategic
positioning, and the emerging trends in online advertising strategies.
Organization of the Tenth Edition
The needs and interests of the reader provided the focus in the development of this volume. The authors’ goal is to present a clear, timely, and engaging examination of business marketing management. To this end, each chapter provides an overview, highlights
key concepts, and includes several carefully chosen examples of contemporary business
Preface
ix
marketing practice, as well as a cogent summary and a set of provocative discussion
questions. Contemporary business marketing strategies and challenges are illustrated
with three types of vignettes: “B2B Top Performers,” “Inside Business Marketing,” and
“Ethical Business Marketing.”
The book is divided into six parts with a total of 17 chapters. Part I introduces the
distinguishing features of the business marketing environment. Careful examination
is given to each of the major types of customers, the nature of the procurement function, and key trends that are reshaping buyer-seller relationships. Relationship management establishes the theme of Part II, in which chapter-length attention is given
to organizational buying behavior and customer relationship management. By thoroughly updating and illustrating the core content, this section provides a timely and
comprehensive treatment of customer profitability analysis and relationship management strategies for business markets. After this important background is established,
Part III centers on the techniques that can be applied in assessing market opportunities:
market segmentation and demand analysis, including sales forecasting.
Part IV centers on the planning process and on designing marketing strategy for
business markets. Recent work drawn from the strategic management and strategic
marketing areas provides the foundation for this section. This edition provides an
expanded and integrated treatment of marketing strategy development using the balanced scorecard, enriched by strategy mapping. Special emphasis is given to defining
characteristics of successful business-to-business firms and to the interfacing of marketing with other key functional areas such as manufacturing, research and development, and customer service. This functionally integrated planning perspective serves
as a focal point in the analysis of the strategy development process. Here at the core of
the volume, a separate chapter provides an integrated treatment of strategy formulation for the global market arena, giving particular attention to the new forms of competitive advantage that rapidly developing economies present (for example, China).
Next, each component of the marketing mix is examined from a business marketing perspective. The product chapter gives special attention to the brand-building
process and to the strategic importance of providing competitively superior value to
customers. Adding further depth to this core section are the chapters on managing
product innovation and managing services for business markets. In turn, special attention is given to e-commerce and supply chain strategies for business markets. Building
on the treatment of customer relationship marketing provided in Part II, the personal
selling chapter explores the drivers of relationship marketing effectiveness as well as
the financial impact of relationship marketing programs.
Marketing performance measurement provides the central focus for Part V. It
provides a compact treatment of marketing control systems and uses the balanced
scorecard as an organizing framework for marketing profitability analysis. Special attention is given to identifying the drivers of marketing strategy performance and to
the critical area of strategy implementation in the business marketing firm. Part VI
includes a collection of cases tailored to the business marketing environment.
Cases
Part VI includes 12 cases, 8 of which are new to this edition. These cases, of varying lengths, isolate one or more business marketing problems. Included among the
selections for this edition are cases that raise provocative issues and illustrate the
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Preface
challenges and opportunities that small firms confront and the best practices of leadingedge firms such as Medtronics Corporation, Hewlett-Packard, FedEx, and 3M
Canada. Other cases new to this edition provide students with a variety of business
marketing strategy applications. A Case Planning Guide, which keys the cases to relevant text chapters, provides an organizing structure for Part VI. In addition, a short
case, isolating core concepts, is included with each chapter. Two-thirds of the endof-chapter cases are new to this edition and uncover opportunities and challenges
confronting firms such as Apple, Intuit, Sealed Air Corp, SunPower, and Cisco.
These cases provide a valuable tool for sparking class discussion and bringing strategy issues to life.
Ancillary Package
We are most indebted to John Eaton, Arizona State University, for his fine work in
bringing together all of the elements of the ancillary package so that all supplements
work together seamlessly. The ancillary package includes:
Instructor’s Resource CD (IRCD)
The Instructor’s Resource CD delivers all the traditional instructor support materials
in one handy place: a CD. Included on the CD are electronic files for the complete Instructor’s Manual, Test Bank, computerized Test Bank and computerized Test Bank
software (ExamView), and chapter-by-chapter PowerPoint presentation files that can
be used to enhance in-class lectures. PowerPoint files have been thoroughly updated
and feature hundreds of new slides that instructors can use to tailor their lectures to
their particular needs and preferences. We are indebted to Ray DeCormier, Central
Connecticut State University, for developing the PowerPoint files and for contributing his expertise to this project.
Instructor’s Manual The Instructor’s Manual for the tenth edition of Business
Marketing Management: B2B provides a variety of creative suggestions designed to
help the instructor incorporate all the materials available to create a dynamic learning
environment. A few of the key features available in the Instructor’s Manual for this
edition include
• course design suggestions
• chapter outlines and supporting chapter materials
• suggested readings listed by chapter
• case analysis suggestions as well as assessment rubrics
• cooperative learning exercises
• ideas for effectively integrating the video package into the classroom
discussion
The Instructor’s Manual files are located on the IRCD and are also available for
download at the text support site, http://www.cengage.com/marketing/hutt.
Preface
xi
Test Bank The revised and updated Test Bank includes over 1,500 multiple-choice
and true/false questions, emphasizing the important concepts presented in each chapter, along with an average of five essay questions per chapter. The Test Bank questions vary in levels of difficulty so that each instructor can tailor the testing to meet
specific needs. Each question is tagged to AACSB standards, discipline guidelines,
and Rubin/Dierdorff standards. The Test Bank files are located on the IRCD.
ExamView (Computerized) Test Bank The Test Bank is also available on the
IRCD in computerized format (ExamView), allowing instructors to select problems
at random by level of difficulty or type, customize or add test questions, and scramble
questions to create up to 99 versions of the same test. This software is available in
Mac or Windows formats.
PowerPoint Presentation Slides The PowerPoint presentation slides bring classroom lectures and discussions to life with the Microsoft PowerPoint presentation tool.
These presentations are organized by chapter, helping to create an easy-to-follow lecture, and are extremely professor friendly and easy to read. There are two PowerPoint versions for this edition: the GOLD version includes varying slide background
and animation; the SILVER version provides simpler design for professors who would
like to add their own material. The PowerPoint presentation slides are available on
the IRCD and as downloadable files on the text support site, http://www.cengage
.com/marketing/hutt.
Web Site
Visit the text Web site at http://www.cengage.com/marketing/hutt to find instructor’s support materials as well as study resources that will help students practice and
apply the concepts they have learned in class.
Videos
A new video package has been prepared to provide a relevant and interesting visual
teaching tool for the classroom. Each video segment applies text materials to the real
world, demonstrating how everyday companies effectively deal with business marketing management issues.
Student Resources
Online quizzes for each chapter are available on the Web site for those students who
would like additional study materials. After each quiz is submitted, automatic feedback
tells the students how they scored and what the correct answers are to the questions
they missed. Students are then able to e-mail their results directly to their instructor,
if desired.
Acknowledgments
The development of a textbook draws upon the contributions of many individuals. First,
we would like to thank our students and former students at Arizona State University,
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Preface
Miami University, the University of Alabama, and the University of Vermont. They provided important input and feedback when selected concepts or chapters were originally
class tested. We would also like to thank our colleagues at each of these institutions for
their assistance and support.
Second, we express our gratitude to several distinguished colleagues who carefully reviewed the volume and provided incisive comments and valuable suggestions
that improved the tenth edition. They include: Blaine Branchik, Quinnipiac University;
Brian Brown, University of Massachusetts, Amherst; Abbie Griffin, University of Utah;
Peter A. Reday, Youngstown State University; Larry P. Schramm, Oakland University;
Judy Wagner, East Carolina University; and Jianfeng Wang, Mansfield University of
Pennsylvania.
We would also like to express our continuing appreciation to others who provided important suggestions that helped shape earlier editions: Kenneth Anselmi, East
Carolina University; Joseph A. Bellizzi, Arizona State University; Paul D. Boughton,
Saint Louis University; Michael R. Czinkota, Georgetown University; S. Altan Erdem,
University of Houston–Clear Lake; Troy Festervand, Middle Tennessee State University;
Srinath Gopalakrishna, University of Missouri, Columbia; Paris A. Gunther, University
of Cincinnati; Jon M. Hawes, University of Akron; Jonathan Hibbard, Boston University;
Lee Hibbert, Freed-Hardeman University; George John, University of Minnesota; Joe H.
Kim, Rider University; Kenneth M. Lampert, Metropolitan State University, Minnesota;
Jay L. Laughlin, Kansas State University; J. David Lichtenthal, Baruch College; Gary L.
Lilien, Pennsylvania State University; Lindsay N. Meredith, Simon Fraser University;
K. C. Pang, University of Alabama at Birmingham; Richard E. Plank, University of South
Florida; Constantine Polytechroniou, University of Cincinnati; Bernard A. Rausch,
Illinois Institute of Technology; David A. Reid, The University of Toledo; Paul A. Roobol,
Western Michigan University; Beth A. Walker, Arizona State University; Elizabeth
Wilson, Suffolk University; James F. Wolter, Grand Valley State University; Ugut
Yucelt, Pennsylvania State University at Harrisburg; and John M. Zerio, American
Graduate School of International Management.
We are especially indebted to four members of the Board of Advisors for Arizona State University’s Center for Services Leadership. Each served as a senior executive sponsor for a funded research study, provided access to the organizations, and
contributed valuable insights to the research. Collectively, these studies sharpened
the strategy content of the volume. Included here are Michael Daniels, Senior Vice
President, Global Technology Services, IBM Global Services; Greg Reid, Chief Marketing Officer, YRC Worldwide Inc.; Adrian Paull, Vice President, Customer Product
Support, Honeywell Aerospace; and Merrill Tutton, President, AT&T UK, retired. We
would like to thank Jim Ryan, President and Chief Executive Officer, W. W. Grainger,
for his insights and contributions to this edition. We would also like to thank
Mohan Kuruvilla, Adjunct Professor, Indian Institute of Management Kozhikode, for his
keen insights and recommendations. We also extend our special thanks to Dr. Joseph
Belonax, Western Michigan University, for contributing ideas and content to the teaching package.
The talented staff of South-Western/Cengage Learning displayed a high level of
enthusiasm and deserves special praise for their contributions in shaping this edition.
In particular, Mike Roche provided valuable advice and keen insights for this edition.
In turn, we were indeed fortunate to have Erin Berger, our development editor, on
our team. Her steady hand, efficient style, and superb coordinating skills advanced the
project. Pamela Rockwell contributed excellent copyediting skills and Melissa Sacco,
Preface
xiii
our Project Manager, provided a confident style and a seasoned approach during
the production process. We express our gratitude to Diane A. Davis, Arizona State
University, for lending her superb administrative skills and creative talent to the
project and for delivering under pressure.
Finally, but most importantly, our overriding debt is to our wives, Rita and Sara,
whose encouragement, understanding, and direct support were vital to the completion of this edition. Their involvement and dedication are deeply appreciated.
Michael D. Hutt
Thomas W. Speh
ABOUT THE AUTHORS
Michael D. Hutt (PhD, Michigan State University) is the Ford Motor Company
Distinguished Professor of Marketing at the W. P. Carey School of Business, Arizona
State University. He has also held faculty positions at Miami University (Ohio) and
the University of Vermont.
Dr. Hutt’s teaching and research interests are concentrated in the areas of businessto-business marketing and strategic marketing. His current research centers on the crossfunctional role that marketing managers assume in the formation of strategy. Dr. Hutt’s
research has been published in the Journal of Marketing, Journal of Marketing Research,
MIT Sloan Management Review, Journal of Retailing, Journal of the Academy of Marketing
Science, and other scholarly journals. He is also the co-author of Macro Marketing ( John
Wiley & Sons) and contributing author of Marketing: Best Practices (South-Western).
Assuming a variety of leadership roles for American Marketing Association programs, he co-chaired the Faculty Consortium on Strategic Marketing Management.
He is a member of the editorial review boards of the Journal of Business-to-Business
Marketing, Journal of Business & Industrial Marketing, Industrial Marketing Management, Journal of the Academy of Marketing Science, and Journal of Strategic Marketing.
For his 2000 contribution to MIT Sloan Management Review, he received the Richard
Beckhard Prize. Dr. Hutt has consulted on marketing strategy issues for firms such as
IBM, Motorola, Honeywell, AT&T, Arvin Industries, ADT, and Black-Clawson, and
for the food industry’s Public Policy Subcommittee on the Universal Product Code.
Thomas W. Speh, PhD, is Professor of Marketing Emeritus and Associate Director
of MBA Programs at the Farmer School of Business, Miami University (Ohio).
Dr. Speh earned his PhD from Michigan State University. Prior to his tenure at
Miami, Dr. Speh taught at the University of Alabama.
Dr. Speh has been a regular participant in professional marketing and logistics
meetings and has published articles in a number of academic and professional journals, including the Journal of Marketing, Sloan Management Review, Harvard Business
Review, Journal of the Academy of Marketing Sciences, Journal of Business Logistics, Journal
of Retailing, Journal of Purchasing and Materials Management, and Industrial Marketing
Management. He was the recipient of the Beta Gamma Sigma Distinguished Faculty
award for excellence in teaching at Miami University’s School of Business and of the
Miami University Alumni Association’s Effective Educator award.
Dr. Speh has been active in both the Warehousing Education and Research
Council (WERC) and the Council of Logistics Management (CLM). He has served as
president of WERC and as president of the CLM. Dr. Speh has been a consultant on
strategy issues to such organizations as Xerox, Procter & Gamble, Burlington Northern Railroad, Sara Lee, J. M. Smucker Co., and Millenium Petrochemicals, Inc.
xiv
CASE CONTRIBUTORS
Erin Anderson, INSEAD
Bradley W. Brooks, Queens University of Charlotte
Clayton M. Christensen, Harvard Business School
Terry H. Deutscher, Richard Ivey School of Business
Ali F. Farhoomand, University of Hong Kong
John H. Friar, Northeastern University
John B. Gifford, Miami University (Ohio)
Raymond M. Kinnunen, Northeastern University
Marc H. Meyer, Northeastern University
David W. Rosenthal, Miami University (Ohio)
David V. Rudd, Lebanon Valley College
Susan Sieloff, Northeastern University
Robert E. Spekman, Darden School of Business, University of Virginia
David Weinstein, INSEAD
John M. Zerio, Thunderbird School of Global Management
xv
CONTENTS IN BRIEF
Preface
PART I
PART II
PART III
PART IV
xvi
vii
THE ENVIRONMENT OF BUSINESS MARKETING
1
Chapter 1 A Business Marketing Perspective
3
Chapter 2 The Business Market: Perspectives
on the Organizational Buyer
33
MANAGING RELATIONSHIPS IN BUSINESS MARKETING
61
Chapter 3 Organizational Buying Behavior
63
Chapter 4 Customer Relationship Management
Strategies for Business Markets
91
ASSESSING MARKET OPPORTUNITIES
121
Chapter 5 Segmenting the Business Market
and Estimating Segment Demand
123
FORMULATING BUSINESS MARKETING STRATEGY
151
Chapter 6 Business Marketing Planning:
Strategic Perspectives
153
Chapter 7 Business Marketing Strategies
for Global Markets
180
Chapter 8 Managing Products
for Business Markets
208
Chapter 9 Managing Innovation and New
Industrial Product Development
232
Contents in Brief
PART V
xvii
Chapter 10 Managing Services
for Business Markets
257
Chapter 11 Managing Business
Marketing Channels
281
Chapter 12 E-Commerce Strategies
for Business Markets
303
Chapter 13 Supply Chain Management
329
Chapter 14 Pricing Strategy for
Business Markets
358
Chapter 15 Business Marketing Communications:
Advertising and Sales Promotion
383
Chapter 16 Business Marketing Communications:
Managing the Personal
Selling Function
407
EVALUATING BUSINESS MARKETING
STRATEGY AND PERFORMANCE
Chapter 17 Marketing Performance
Measurement
433
435
Cases
462
Name Index
609
Subject Index
619
CONTENTS
Preface
PART I
vii
THE ENVIRONMENT OF BUSINESS MARKETING
Chapter 1
A Business Marketing Perspective
Business Marketing
Business Marketing Management
Business Market Customers
3
4
5
6
B2B TOP PERFORMERS: Jim Ryan, President and Chief Executive Officer,
W.W. Grainger, Inc.
Business Markets versus Consumer-Goods Markets
7
7
B2B TOP PERFORMERS: Career Path for B2B CEOs: For Many,
It Began in Marketing!
9
Creating the Customer Value Proposition
Marketing’s Cross-Functional Relationships
Characteristics of Business Markets
Business and Consumer Marketing: A Contrast
10
11
13
14
Smucker: A Consumer and Business Marketer
Distinguishing Characteristics
A Relationship Emphasis
The Supply Chain
Supply Chain Management
15
16
16
17
18
Managing Relationships in the Supply Chain
Commercial Enterprises as Consumers
19
21
INSIDE BUSINESS MARKETING: The iPhone: A Triumph of Supply Chain
Management Too
Classifying Goods for the Business Market
Entering Goods
Foundation Goods
Facilitating Goods
Business Marketing Strategy
Illustration: Manufactured Materials and Parts
Illustration: Installations
Illustration: Supplies
A Look Ahead
Summary
xviii
1
22
22
23
24
24
26
26
26
26
27
29
Contents
xix
Discussion Questions
29
Internet Exercises
Case: R.I.M.’s BlackBerry and Apple’s iPhone: The Face-Off
in the Business Market
30
New Strategy Directions
Discussion Questions
31
32
Chapter 2
The Business Market: Perspectives
on the Organizational Buyer
31
33
Commercial Enterprises: Unique Characteristics
Distribution by Size
Geographical Concentration
34
35
35
Classifying Commercial Enterprises
The Purchasing Organization
Goals of the Purchasing Function
36
37
38
INSIDE BUSINESS MARKETING: The Supply Chain for McNuggets
Strategic Procurement
39
INSIDE BUSINESS MARKETING: Respond with Value-Based Selling Tools
E-Procurement
43
39
Everyone Is Getting Wired
Enhancing the Buyer’s Capabilities
44
44
45
Delivering Measurable Results
Buying Direct and Indirect Goods
Reverse Auctions
45
45
46
ETHICAL BUSINESS MARKETING: Gift Giving: “Buy Me These
Boots and You’ll Get My Business”
How Organizational Buyers Evaluate Potential Suppliers
Governments: Unique Characteristics
E-Government
Influences on Government Buying
Understanding Government Contracts
Telling Vendors How to Sell: Useful Publications
Purchasing Organizations and Procedures: Government
Federal Buying
A Different Strategy Required
The Institutional Market: Unique Characteristics
Institutional Buyers: Purchasing Procedures
Dealing with Diversity: A Market-Centered Organization
47
47
47
49
49
49
50
50
52
53
53
54
57
xx
Contents
PART II
Summary
57
Discussion Questions
Internet Exercises
58
59
Case: Sealed Air Corporation: Delivering Packaging Solutions
Discussion Questions
60
60
MANAGING RELATIONSHIPS IN BUSINESS MARKETING
61
Chapter 3
Organizational Buying Behavior
63
The Organizational Buying Process
The Search Process
New Task
Straight Rebuy
65
66
67
68
Modified Rebuy
Forces Shaping Organizational Buying Behavior
Environmental Forces
Organizational Forces
Strategic Priorities in Purchasing
69
71
71
73
73
Organizational Positioning of Purchasing
75
INSIDE BUSINESS MARKETING: Go Digital to Target
Buying Influentials
Group Forces
77
77
INSIDE BUSINESS MARKETING: Innovate and Win with BMW
Individual Forces
80
82
B2B TOP PERFORMERS: Delivering Customer Solutions
The Organizational Buying Process: Major Elements
Summary
Discussion Questions
84
85
86
87
Internet Exercises
Case: The Tablet PC for Nurses: A Mobile Clinical Assistant
Discussion Questions
Chapter 4
Customer Relationship Management
Strategies for Business Markets
Relationship Marketing
Types of Relationships
Value-Adding Exchanges
Nature of Relationships
Strategic Choices
88
89
90
91
92
93
94
94
94
Contents
B2B TOP PERFORMERS: Understanding the Customer’s
Business—The Key to Success
Managing Buyer-Seller Relationships
95
95
Transactional Exchange
95
Collaborative Exchange
Switching Costs
96
96
Strategy Guidelines
Measuring Customer Profitability
97
99
Activity-Based Costing
99
Unlocking Customer Profitability
The Profitable Few
99
100
Managing High- and Low-Cost-to-Serve Customers
Managing Unprofitable Customers
101
103
Firing Customers
Customer Relationship Management
Acquiring the Right Customers
103
104
104
INSIDE BUSINESS MARKETING: Diversify a Customer Portfolio Too!
Crafting the Right Value Proposition
Instituting the Best Processes
PART III
xxi
106
107
109
Motivating Employees
Learning to Retain Customers
Strategic Alliances
Accessing Complementary Skills
Benefits of Strategic Alliances
Determinants of Alliance Success
110
111
112
112
113
114
The Social Ingredients of Alliance Success
Summary
Discussion Questions
Internet Exercises
Case: Hewlett-Packard Challenges from a Diverse Mix
of Demanding Customers
116
118
118
119
ASSESSING MARKET OPPORTUNITIES
121
Chapter 5
Segmenting the Business Market
and Estimating Segment Demand
Business Market Segmentation Requirements and Benefits
Requirements
Benefits
120
123
125
125
125
xxii
Contents
INSIDE BUSINESS MARKETING: How to See What’s Next
126
Bases for Segmenting Business Markets
Macrolevel Bases
127
128
Microlevel Bases
131
B2B TOP PERFORMERS: Steering Customers to the
Right Channel
Illustration: Microsegmentation
The Segmentation Process
Choosing Market Segments
INSIDE BUSINESS MARKETING: A Fresh Approach to Segmentation:
Customer Service Segmentation
Isolating Market Segment Profitability
Implementing a Segmentation Strategy
Estimating Segment Demand
The Role of the Demand Estimation
INSIDE BUSINESS MARKETINGL: Accurate Forecasts
Drive Effective Collaboration between Boeing and Alcoa
Methods of Forecasting Demand
Qualitative Techniques
136
136
136
137
138
139
139
140
141
142
142
Quantitative Techniques
CPFR: A New Collaborative Approach to Estimating Demand
144
145
Combining Several Forecasting Techniques
Summary
Discussion Questions
Internet Exercises
146
147
147
148
Case: Federated Insurance: Targeting Small
Businesses
PART IV
133
Cultivating Business Relationships
149
149
Discussion Questions
150
FORMULATING BUSINESS MARKETING STRATEGY
151
Chapter 6
Business Marketing Planning:
Strategic Perspectives
Marketing’s Strategic Role
The Hierarchy of Strategies
Strategy Formulation and the Hierarchy
153
154
154
156
Contents
INSIDE BUSINESS MARKETING: From Bullet-Point Plans
to Strategic Stories at 3M
Functionally Integrated Planning: The Marketing Strategy Center
B2B TOP PERFORMERS: Cross-Functional Relationships: Effective
Managers Deliver on Promises
xxiii
158
158
159
The Components of a Business Model
160
Customer Interface
Core Strategy
162
163
Strategic Resources
The Value Network
Strategic Positioning
164
164
Strategic Positioning Illustrated
166
167
Building the Strategy Plan
The Balanced Scorecard
Financial Perspective
Customer Perspective
Internal Business Process Perspective
Strategy Map
Summary
Discussion Questions
Internet Exercises
Case: Microsoft Targets Small and Mid-Sized Businesses
Challenging Intuit, Inc.
Discussion Questions
Chapter 7
Business Marketing Strategies
for Global Markets
Capturing Global Advantage in Rapidly Developing Economies
Mapping Sources of Global Advantage
The Cost Advantage
The Market Access Advantage
The Capabilities Advantage
INSIDE BUSINESS MARKETING: How Offshore Outsourcing
Affects Customer Satisfaction—and a Company’s Stock Price!
The Outsourcing Decision
Global Market Entry Options
Exporting
165
168
168
170
171
173
175
176
177
178
178
179
180
181
182
183
186
187
188
189
190
190
xxiv
Contents
Contracting
191
Strategic Global Alliances (SGA)
Joint Ventures
192
193
ETHICAL BUSINESS MARKETING: The Bribery Dilemma in
Global Markets
194
Choosing a Mode of Entry
195
Multidomestic versus Global Strategies
195
B2B TOP PERFORMERS: General Electric Aircraft Engines:
Global Strategy Means Help Your Customers
Source of Advantage: Multidomestic versus Global
Types of International Strategy
A Strategic Framework
Global Strategy
196
197
198
199
Build on a Unique Competitive Position
Emphasize a Consistent Positioning Strategy
201
201
201
Establish a Clear Home Base for Each Distinct Business
Leverage Product-Line Home Bases at Different Locations
Disperse Activities to Extend Home-Base Advantages
Coordinate and Integrate Dispersed Activities
Managing Risk in Emerging Markets
201
202
202
202
203
Summary
Discussion Questions
203
204
Internet Exercise
Case: Schwinn: Could the Story Have Been Different?
Alternative Reality One: Aim High
205
206
206
Alternative Reality Two: If You Can’t Beat Them, Join Them
Discussion Question
206
207
Chapter 8 Managing Products for Business Markets
Building a Strong B2B Brand
Brand-Building Steps
A Systems Model for Managing a Brand
B2B TOP PERFORMERS: Corporate Brand Personality Traits
of a Successful 21st-Century Business
Product Quality and Customer Value
Meaning of Quality
Meaning of Customer Value
Product Support Strategy: The Service Connection
208
209
210
212
214
215
215
216
218
Contents
xxv
Product Policy
218
Types of Product Lines Defined
Defining the Product Market
218
219
B2B TOP PERFORMERS: BASF: Using Services to Build a Strong Brand
Planning Industrial Product Strategy
221
221
Product Positioning
The Process
221
Isolating Strategy Opportunities
Product Positioning Illustrated
222
The Technology Adoption Life Cycle
Types of Technology Customers
INSIDE BUSINESS MARKETING: The Gorilla Advantage
in High-Tech Markets
Strategies for the Technology Adoption Life Cycle
The Bowling Alley
The Tornado
221
223
223
224
225
225
226
227
Main Street
Summary
228
228
Discussion Questions
Internet Exercise
Case: Cisco TelePresence: The “As if you were there” Technology
229
230
231
Benefits
The Price Tag
231
231
Discussion Questions
231
Chapter 9
Managing Innovation and New
Industrial Product Development
The Management of Innovation
Induced Strategic Behavior
Autonomous Strategic Behavior
Product Championing and the Informal Network
Conditions Supporting Corporate Entrepreneurship
Managing Technology
Classifying Development Projects
A Product-Family Focus
The Disruptive Innovation Model
Illustration: A New-Market Disruption
Innovation Winners in High-Technology Markets
232
233
234
234
236
238
238
239
239
240
243
243
xxvi
Contents
INSIDE BUSINESS MARKETING: Patching: The New Corporate
Strategy in Dynamic Markets
The New-Product-Development Process
245
246
What Drives a Firm’s New Product Performance?
246
Anticipating Competitive Reactions
248
Sources of New Product Ideas
248
B2B TOP PERFORMERS: IDEO: The Hits Just Keep on Coming!
249
Determinants of New Product Performance and Timeliness
The Determinants of Success
251
251
Fast-Paced Product Development
Summary
Discussion Questions
Internet Exercise
Case: Steelcase Inc. Extends Reach to Growing Health-Care Market
252
253
254
255
256
Discussion Question
256
Chapter 10
Managing Services for Business
Markets
257
Understanding the Full Customer Experience
The Customer Experience Life Cycle
Applying the Customer Experience Map
258
258
260
Customer Experience Management
A Solution-Centered Perspective
260
260
INSIDE BUSINESS MARKETING: Do Service Transition Strategies Pay Off ?
Benefits of Solution Marketing
Business Service Marketing: Special Challenges
Services Are Different
Tangible or Intangible?
Simultaneous Production and Consumption
Service Variability
Service Perishability
Nonownership
262
262
263
264
264
265
265
266
266
INSIDE BUSINESS MARKETING: To Sell Jet Engines, Teach Your Customer
How to Sell Aircraft
Service Quality
Dimensions of Service Quality
Customer Satisfaction and Loyalty
267
268
268
268
Contents
xxvii
Service Recovery
269
Zero Defections
Return on Quality
270
270
Marketing Mix for Business Service Firms
Segmentation
271
271
Service Packages
272
Pricing Business Services
Services Promotion
275
276
Services Distribution
Developing New Services
277
277
Summary
Discussion Questions
Internet Exercise
278
278
279
Case: SafePlace Corporation
Discussion Questions
280
280
Chapter 11
Managing Business Marketing
Channels
The Business Marketing Channel
Direct Channels
INSIDE BUSINESS MARKETING: IBM Uses the Internet to Collaborate
with Channel Partners and Build Customer Loyalty
Indirect Channels
Integrated Multichannel Models
281
282
283
284
284
Participants in the Business Marketing Channel
285
287
Distributors
Manufacturers’ Representatives
287
290
B2B TOP PERFORMERS: Why Intel Uses Reps
Channel Design
Step 1: Define Customer Segments
Step 2: Customers’ Channel Needs by Segment
Step 3: Assess the Firm’s Channel Capabilities
Step 4: Benchmark to Competitors
Step 5: Create Channel Solutions for Customers’ Latent Needs
Step 6: Evaluate and Select Channel Options
Crucial Points in Channel Transformation
Channel Administration
291
292
293
293
294
294
295
295
295
296
xxviii
Contents
Selection of Channel Members
296
Motivating Channel Members
Summary
297
299
Discussion Questions
Internet Exercise
299
300
Case: SunPower’s Go-to-Market Strategy
301
Discussion Questions
301
Chapter 12
E-Commerce Strategies for Business
Markets
Defining E-Commerce
Key Elements Supporting E-Commerce
Intranets and Extranets
303
305
307
307
INSIDE BUSINESS MARKETING: Extending the Boundaries of
E-Commerce: B2M (Business to Machines) E-Commerce
The Strategic Role of E-Commerce
E-Commerce as a Strategic Component
308
309
309
INSIDE BUSINESS MARKETING: UPS Delivers the Goods Using Sophisticated
E-Commerce Technology
310
What the Internet Can Do
The Internet: Strategy Still Matters
Crafting an E-Commerce Strategy
Delineating E-Commerce Objectives
Specific Objectives of Internet Marketing Strategies
B2B TOP PERFORMERS: GE Healthcare: Using the Web to Create New Services
Internet Strategy Implementation
The Internet Product
INSIDE BUSINESS MARKETING: “Borrow Best Tactics From
Consumer E-Commerce To Revamp Your B2B Site”
Channel Considerations with Internet Marketing
The Internet as a Channel Alternative
The Effect of the Internet on Pricing Strategy
The Internet and Customer Communication
Summary
Discussion Questions
Internet Exercise
Case: Using the Internet at W.W. Grainger
Discussion Questions
310
311
312
314
314
316
316
316
318
320
321
322
322
324
325
326
327
328
Contents
Chapter 13
Supply Chain Management
xxix
329
The Concept of Supply Chain Management
331
Partnerships: The Critical Ingredient
Supply Chain Management: A Tool for Competitive Advantage
332
333
Supply Chain Management Goals
Benefits to the Final Customer
335
336
INSIDE BUSINESS MARKETING: When the Chain Breaks
The Financial Benefits Perspective
Information and Technology Drivers
Successfully Applying the Supply Chain Management Approach
337
337
338
339
B2B TOP PERFORMERS: Making Supplier Relationships Work
Successful Supply Chain Practices
Logistics as the Critical Element in Supply Chain Management
340
340
341
Distinguishing Between Logistics and Supply Chain Management
Managing Flows
342
342
The Strategic Role of Logistics
Sales-Marketing-Logistics Integration
Just-in-Time Systems
Total-Cost Approach
Calculating Logistics Costs
343
343
343
344
346
Activity-Based Costing
Total Cost of Ownership
Business-to-Business Logistical Service
Logistics Service Impacts on the Customer
Determining the Level of Service
346
346
346
347
348
Logistics Impacts on Other Supply Chain Participants
Business-to-Business Logistical Management
Logistical Facilities
Transportation
Inventory Management
348
349
349
350
352
INSIDE BUSINESS MARKETING: The Profit Impact of Inventory
Management
Third-Party Logistics
Summary
Discussion Questions
Internet Exercise
Case: Managing Logistics at Trans-Pro
Discussion Question
353
353
355
355
356
357
357
xxx
Contents
Chapter 14
Pricing Strategy for Business Markets
358
The Meaning of Value in Business Markets
359
Benefits
Sacrifices
360
360
Value-Based Strategies
The Pricing Process in Business Markets
361
362
Price Objectives
362
Demand Determinants
Value-Based Pricing Illustrated
363
Cost Determinants
Competition
365
368
370
Pricing across the Product Life Cycle
Pricing New Products
371
372
INSIDE BUSINESS MARKETING: Understanding the Economic
Value of New Products
Legal Considerations
Responding to Price Attacks by Competitors
373
373
Evaluating a Competitive Threat
Understanding the Rules of Competitive Strategy
Competitive Bidding
374
374
376
377
Closed Bidding
Open Bidding
Strategies for Competitive Bidding
Summary
Discussion Questions
377
378
378
379
380
Internet Exercise
Case: Price Like a Retailer, Not a Widget Maker
381
Discussion Questions
Chapter 15
Business Marketing Communications:
Advertising and Sales Promotion
The Role of Advertising
Integrated Communication Programs
Enhancing Sales Effectiveness
Increased Sales Efficiency
Creating Awareness
Interactive Marketing Communications
382
382
383
385
385
385
385
386
386
Contents
xxxi
What Business-to-Business Advertising Cannot Do
387
Managing Business-to-Business Advertising
Defining Advertising Objectives
387
387
Written Objectives
Determining Advertising Expenditures
388
389
Developing the Advertising Message
391
Selecting Advertising Media for Business Markets
392
INSIDE BUSINESS MARKETING: Viral Marketing Campaigns Create Buzz
393
B2B TOP PERFORMERS: Search Engine Marketing at Google:
The Right Message, the Right Time
395
Direct Marketing Tools
Measuring Advertising Effectiveness
396
397
Measuring Impacts on the Purchase Decision
The Measurement Program
Managing Trade Show Strategy
398
398
400
Trade Shows: Strategy Benefits
Trade-Show Investment Returns
400
401
Planning Trade-Show Strategy
Trade-Show Objectives
Selecting the Shows
Managing the Trade-Show Exhibit
Evaluating Trade-Show Performance
Summary
Discussion Questions
Internet Exercise
401
402
402
402
403
404
405
405
Case: Johnson Controls, Inc.
Discussion Questions
406
406
Chapter 16
Business Marketing Communications:
Managing the Personal Selling
Function
Relationship Marketing Strategy
Drivers of Relationship Marketing Effectiveness
Relationship Marketing (RM) Programs
Financial Impact of RM Programs
Targeting RM Programs
Managing the Sales Force
Organizing the Personal Selling Effort
407
409
409
411
411
412
413
413
xxxii
Contents
Key Account Management
414
National Account Success
417
B2B TOP PERFORMERS: Using Customized Strategies
to Outmaneuver Rivals
Isolating the Account Management Process
PART V
418
418
Account Management Success
Sales Administration
419
421
Recruitment and Selection of Salespersons
Training
421
421
Supervision and Motivation
Evaluation and Control
Models for Business-to-Business Sales Force Management
422
425
426
Deployment Analysis: A Strategic Approach
Summary
426
429
Discussion Questions
Internet Exercise
Case: Account Management at YRC Worldwide: Choosing
Customers Wisely
Discussion Question
429
430
EVALUATING BUSINESS MARKETING STRATEGY
AND PERFORMANCE
Chapter 17
431
431
433
Marketing Performance Measurement 435
A Strategy Map: Portrait of an Integrated Plan
Developing the Strategy: The Process
Maps: A Tool for Strategy Making
437
438
441
Marketing Strategy: Allocating Resources
Guiding Strategy Formulation
Managing Individual Customers for Profit
441
442
The Marketing Control Process
Control at Various Levels
Strategic Control
Annual Plan Control
Marketing Control: The Marketing Performance Dashboard
Efficiency and Effectiveness Control
Profitability Control
Implementation of Business Marketing Strategy
442
443
443
443
446
446
448
449
451
Contents
INSIDE BUSINESS MARKETING: Tracking Marketing Success at Siemens
The Strategy-Implementation Fit
Implementation Skills
xxxiii
452
452
453
The Marketing Strategy Center: An Implementation Guide
454
Looking Back
455
B2B TOP PERFORMERS: Cross-Functional Relationships:
Effective Managers Deliver on Promises
Summary
456
457
Discussion Questions
458
Internet Exercise
Case: Intuit Leads in the Accounting Software Market
459
460
Discussion Question
460
Cases
461
Case Planning Guide
Columbia Industries, Inc.
Clariant Corporation Marketing
461
462
471
Circuit Board Corporation
3M Canada: Industrial Business Division
Fedex Corp.: Structural Transformation through e-business
Clearwater Technologies
Barro Stickney, Inc.
486
499
515
535
541
We’ve Got Rhythm! Medtronic Corporation’s
Cardiac Pacemaker Business
547
Total Quality Logistics: Sales Force Management
Telezoo (A): Feast or Famine?
Van Leer Packaging Worldwide: The TOTAL Account (A)
565
583
595
Ethical Dilemmas in Business Marketing
607
Name Index
609
Subject Index
619
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PART
I
THE ENVIRONMENT OF
BUSINESS MARKETING
1
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CHAPTER
1
A Business Marketing Perspective
The business market poses special challenges and significant opportunities for the
marketing manager. This chapter introduces the complex forces that are unique to the
business marketing environment. After reading this chapter, you will understand:
1. the dynamic nature of the business marketing environment and the
basic similarities and differences between consumer-goods and business
marketing.
2. the underlying factors that influence the demand for industrial goods.
3. the nature of buyer-seller relationships in a product’s supply chain.
4. the types of customers in this important market.
5. the basic characteristics of industrial products and services.
3
4
Part I
The Environment of Business Marketing
Business Marketing
Business marketers serve the largest market of all: The dollar volume of transactions
in the industrial or business market significantly exceeds that of the ultimate consumer
market. In the business market, a single customer can account for an enormous level
of purchasing activity. For example, the corporate procurement department at IBM
spends more than $40 billion annually on industrial products and services.1 Others,
such as Procter & Gamble, Apple, Merck, Dell, and Kimberly Clark each spend more
than half of their annual sales revenue on purchased goods and services.2 Indeed, all
formal organizations—large or small, public or private, for-profit or not-for-profit—
participate in the exchange of industrial products and services, thus constituting the
business market.
Business markets are “markets for products and services, local to international,
bought by businesses, government bodies, and institutions (such as hospitals) for incorporation (for example, ingredient materials or components), for consumption (for
example, process materials, office supplies, consulting services), for use (for example,
installations or equipment), or for resale. . . . The only markets not of direct interest
are those dealing with products or services which are principally directed at personal
use or consumption such as packaged grocery products, home appliances, or consumer
banking.”3 The factors that distinguish business marketing from consumer marketing
are the nature of the customer and how that customer uses the product. In business
marketing, the customers are organizations (businesses, governments, institutions).
Business firms buy industrial goods to form or facilitate the production process
or use as components for other goods and services. Government agencies and private
institutions buy industrial goods to maintain and deliver services to their own market: the public. Industrial or business marketing (the terms can be used interchangeably) accounts for more than half the economic activity in the United States, Canada,
and most other nations. More than 50 percent of all business school graduates join
firms that compete directly in the business market. The heightened interest in
high-technology markets—and the sheer size of the business market—has spawned
increased emphasis on business marketing management in universities and corporate
executive training programs.4
This book explores the business market’s special opportunities and challenges and
identifies the new requirements for managing the marketing function in this vital sector of the global economy. The following questions establish the theme of this first
chapter: What are the similarities and differences between consumer-goods marketing
1 Tim Ferguson, “IBM Shifts Procurement HQ to China,” ZDNet News: October 13, 2006, accessed at http://www
.news.zdnet.com on June 1, 2008.
2 Chip W. Hardt, Nicolas Reinecke, and Peter Spiller, “Inventing the 21st Century Purchasing Organization,”
The McKinsey Quarterly (4, 2007): pp. 115–117.
3 Prospectus for the Institute for the Study of Business Markets, College of Business Administration, the Pennsylvania
State University and J. David Lichtenthal, Venkatapparao Mummaleni, and David T. Wilson, “The Essence of Business
Marketing Theory, Research, and Tactics: Contributions from the Journal of Business-to-Business Marketing,” Journal
of Business-to-Business Marketing 15 (2, 2008): pp. 91–123.
4 J. David Lichtenthal, “Business-to-Business Marketing in the 21st Century,” Journal of Business-to-Business Marketing
12 (1, 2, 1998): pp. 1–5; J. Lichtenthal, “Advocating Business Marketing Education: Relevance and Rigor—Uttered as
One,” Journal of Business-to-Business Marketing 14 (1, 2007): pp. 1–12; and Michael D. Hutt and Thomas W. Speh,
“Business Marketing Education: A Distinctive Role in the Undergraduate Curriculum,” Journal of Business-to-Business
Marketing 12 (1, 2, 1998): pp. 103–126.
Chapter 1
FIGURE 1.1
A Business Marketing Perspective
5
POWERFUL B2B BRANDS
Text not available due to copyright restrictions
SOURCES: Caterpillar: Reprinted courtesy of Caterpillar, Inc.
3M: Courtesy of 3M.
DUPONT: Copyright © 2005 DuPont. All rights reserved. The DuPont Oval Logo is a registered trademark of DuPont
and its affiliates. Used by permission.
and business marketing? What customers constitute the business market? How can the
multitude of industrial goods be classified into manageable categories? What forces
influence the behavior of business market demand?
Business Marketing Management
Many large firms that produce goods such as steel, production equipment, or computermemory chips cater exclusively to business market customers and never directly
interact with their ultimate consumers. Other firms participate in both the consumergoods and the business markets. The introduction of laser printers and personal
computers brought Hewlett-Packard, historically a business-to-business marketer,
into the consumer market. Conversely, lagging consumer markets prompted Sony
Corporation to expand to the business market by introducing office automation products. Both companies had to reorient their marketing strategies dramatically because of
significant differences in the buying behavior of consumer versus business markets.
Products like cell phones, office furniture, personal computers, and software are purchased in both the consumer and the business markets. What distinguishes business marketing from consumer-goods marketing is the intended use of the product and the intended
consumer. Sometimes the products are identical, but a fundamentally different marketing
approach is needed to reach the organizational buyer. Interestingly, some of the most
valuable brands in the world belong to business marketers: Cisco, Google, BlackBerry,
Caterpillar, IBM, FedEx, GE, DuPont, Intel, Hewlett-Packard, and 3M5 (Figure 1.1).
5 Frederick E. Webster, Jr. and Kevin Lane Keller, “A Roadmap for Branding in Industrial Markets,” Journal of Brand
Management 11 (May 2004): pp. 388–402; and Matthew Schwartz, “B to B’s Best: Brands,” B to B, Special Issue (2007),
accessed at http://www.btobonline on May 15, 2008.
6
Part I
The Environment of Business Marketing
FIGURE 1.2
THE CONSUMER MARKET (B2C) AND THE BUSINESS
MARKET (B2B) AT DELL
Dell, Inc.
B2C
Customers
Individuals &
Households
Selected
Products
PCs
Printers
Consumer Electronics
Simple Service
Agreements
B2B
Businesses
• Global
• Large corporations
• Small & Medium-sized
businesses
Institutions
• Health care
• Education
Government
• Federal
• State
• Local
PCs
Enterprise Storage
Servers
Complex Service Offerings
Business Market Customers
Business market customers can be broadly classified into three categories: (1) commercial enterprises—that is, businesses; (2) institutions—for example, universities;
and (3) government. Consider Dell, Inc.: The firm serves both the business market
(B2B) and the consumer market (B2C) (Figure 1.2). Importantly, however, more than
80 percent of its sales come from B2B customers!
Dell serves each sector of the business market.6 First, the firm has developed
close relationships with large global enterprises, like Boeing, and large corporate
customers. These customers purchase thousands of personal computers (PCs) and
now turn to Dell for a full range of information technology (IT) products and services. The volume of business coming from a single business customer can be huge:
One customer bought 20,000 laptop computers for its global sales organization,
and some enterprises have an installed base of more than 100,000 Dell computers.
Second, small and medium-sized businesses (SMB) represent a substantial market,
and Dell demonstrates special skills in understanding and reaching these customers.
SMB firms now represent more than 1 million of Dell’s customers in the United
States, and this base is growing rapidly around the world. Third, the firm serves the
government market at all levels as well as institutional customers like universities
and health-care organizations. Across each of its market sectors, a worldwide shift
in demand from desktop computers to mobility products, including notebooks, is
fueling rapid growth for Dell in India and China as well as in Europe, the Middle East, and Africa.7 To compensate for the maturing PC business, Dell has also
6 V. Kasturi Rangan and Marie Bell, “Dell—New Horizons,” Harvard Business School Case #9–502–022, October 10,
2002 (Boston, MA: Harvard Business School Publishing).
7 Daniel Workman, “Dell Computer International Sales,” suite101.com, June 22, 2008, accessed at http://
multinationalexpansion.suite101.com/article.cfm/dell_computer_international_sales on June 28, 2008.
Chapter 1
A Business Marketing Perspective
7
B2B TOP PERFORMERS
Jim Ryan, President and Chief Executive Officer, W.W. Grainger, Inc.
W.W. Grainger, Inc. (NYSE: GWW), with sales
of $6.5 billion, is the leading broad line supplier of
facilities maintenance products serving businesses
and institutions throughout North America.
Through its network of nearly 600 branches,
18 distribution centers, and multiple Web sites,
Grainger helps customers save time and money
by providing them with the right products to keep
their facilities running.
Jim Ryan was elected to group president of
Grainger in 2004, president of Grainger in 2006,
chief operating officer in 2007, adding the title of
chief executive officer in 2008. Ryan’s career at
Grainger is testimony to his philosophy that “you
prepare to be a leader by deliberately taking on
unfamiliar and difficult assignments—those that
many shy away from. Challenging assignments are
the training ground that provides the highest level
of learning, preparing you for leadership at the
top levels of large companies.” Jim’s rise through
the ranks of Grainger includes senior assignments
in IT, Grainger Parts, Marketing, Sales & Service,
and the company’s eBusiness. While in IT, Ryan
oversaw the implementation of the SAP system
and achieved corporate Y2K compliance. Both
of these accomplishments reflect Ryan’s focus on
seeking out challenging undertakings.
Grainger’s success is focused on helping its
customers reduce the overall acquisition costs for
maintenance, repair, and operating (MRO) items.
Grainger encourages customers to eliminate their
inventories of MRO items and rely on Grainger’s
responsive distribution systems and expertise to
provide these items just when they are needed,
reducing the acquisition costs of these indirect
materials. Grainger’s philosophy is to be “customer
intimate,” where a customer’s and a supplier’s
(Grainger) processes are fully integrated so that
the customer becomes more efficient. Essentially,
Grainger seeks to reduce the customer’s total costs
of acquiring MRO products.
Ryan believes that students preparing to be future
leaders of B2B companies can best prepare for that
role by developing four skills during their college
education: (1) discipline and a strong work ethic;
(2) cultivating “people skills”; (3) building analytical
skills; and (4) organizational skills. He advises young
people to focus on the strong work ethic early in
their careers and to accept tough jobs other managers
are not interested in tackling. Echoing his own
tactics, Ryan advises students that “you learn the
critical management skills when you take on those
assignments that are unfamiliar and complicated.” His
accomplishments as a leader of a successful company
are testimony to the wisdom of his approach.
SOURCE: Reprinted by permission of Grainger.
expanded the scope of its product offerings to include a broader array of IT products, including servers and data storage for the business market, and a growing list
of consumer electronics products, such as flat-screen TVs and Global Positioning
Systems (GPS), for the consumer market.
Business Markets versus Consumer-Goods Markets
The basic task of management cuts across both consumer-goods and business marketing. Marketers serving both sectors can benefit by rooting their organizational plan in
8
Part I
The Environment of Business Marketing
a market orientation, which requires superior proficiency in understanding and satisfying customers.8 Such market-driven firms demonstrate
• a set of values and beliefs that places the customers’ interests first9;
• the ability to generate, disseminate, and productively use superior information
about customers and competitors10;
• the coordinated use of interfunctional resources (for example, research and
development, manufacturing).11
Distinctive Capabilities A close examination of a market-driven firm reveals two
particularly important capabilities: market sensing and customer linking.12 First, the
market-sensing capability concerns how well the organization is equipped to continuously sense changes in its market and anticipate customer responses to marketing
programs. Market-driven firms spot market changes and react well in advance of their
competitors (for example, Coca-Cola in the consumer-goods market and 3M in the
business market). Second, the customer-linking capability comprises the particular
skills, abilities, and processes an organization has developed to create and manage
close customer relationships.
Consumer-goods firms, such as Procter & Gamble (P&G), demonstrate these
capabilities in working with powerful retailers like Wal-Mart. Here, multifunctional
teams in both organizations work together by sharing delivery and product-movement
information and by jointly planning promotional activity and product changes. Although
evident in manufacturer-reseller relations in the consumer-goods market, strong
customer-linking capabilities are crucial in the business market, where close buyerseller relationships prevail. Leading business-to-business firms like IBM and HewlettPackard demonstrate distinctive customer-linking skills and Cisco has propelled its
legendary record of growth by forging close working relationships with customers and
channel partners alike.
Managing Customers as Assets Marketing expenditures that were once viewed as
short-term expenses are now being considered as customer assets that deliver value
for the firm and its shareholders.13 As global competition intensifies, marketing managers are under increasing pressure to demonstrate the return on investment from
marketing spending, deliver strong financial performance, and be more accountable
to shareholders.14 To meet these performance standards, firms must develop and
8 George S. Day, “The Capabilities of Market-Driven Organizations,” Journal of Marketing 58 (October 1994): pp. 37–52;
and Gary F. Gebhardt, Gregory S. Carpenter, and John F. Sherry, Jr., “Creating a Market Orientation: A Longitudinal,
Multifirm, Grounded Analysis of Cultural Transformation,” Journal of Marketing 70 (October 2006): pp. 37–55.
9 Rohit Deshpande, John U. Farley, and Frederick E. Webster Jr., “Corporate Culture, Customer Orientation, and
Innovativeness in Japanese Firms: A Quadrad Analysis,” Journal of Marketing 57 (January 1993): pp. 23–37.
10 Ajay K. Kohli and Bernard J. Jaworski, “Market Orientation: The Construct, Research Propositions, and Managerial
Implications,” Journal of Marketing 54 (April 1990): pp. 1–18.
11 John C. Narver and Stanley F. Slater, “The Effect of a Market Orientation on Business Profitability,” Journal of
Marketing 54 (October 1990): pp. 20–35.
12 Day, “Capabilities of Market-Driven Organizations,” pp. 37–52; and Girish Ramani and V. Kumar, “Interaction
Orientation and Firm Performance,” Journal of Marketing 72 (January 2008): pp. 27–45.
13 V. Kumar and Werner Reinartz, Customer Relationship Management (Hoboken, NJ: John Wiley & Sons, 2006).
14 Frederick E. Webster, Jr., Alan J. Malter, and Shankar Ganesan, “The Decline and Dispersion of Marketing
Competence,” MIT Sloan Management Review 46 (Summer 2005): pp. 35–43.
Chapter 1
A Business Marketing Perspective
9
B2B TOP PERFORMERS
Career Path for B2B CEOs: For Many, It Began in Marketing!
Executives with a strong background in sales
and marketing are taking the top position
at leading business marketing firms. Why?
Companies now place increased importance on
customer relationships. “They’ve changed their
sales strategies to emphasize building longterm partnerships with customers. And they’re
building profitable businesses on the notion that
it’s far cheaper to sell to current customers than
it is to acquire new ones.” Sales and marketing
executives understand customers, know the
competitive landscape, and have keen insights
concerning how to add value to the firm’s
offerings and to the customer’s organization.
That is why many firms are tapping sales and
marketing executives for the CEO position. Here
are three examples:
• Cisco Systems—John Chambers began his
career as an IBM salesperson where he learned
the importance of listening carefully to
customers and delivering on promises.1
• Xerox Corporation—Ann Mulcahy spent the
majority of her 25 years at the firm in sales
positions before being appointed president
and CEO.
• GE—In a 20-year career, Jeffrey Immelt held
a variety of GE sales and marketing positions
before being named to succeed Jack Welch
as CEO.
All of these CEOs have taken steps to make
their respective organization more customer
centered. For example, Jeffrey Immelt’s priorities
for GE reflect his background in B2B marketing.
These are “making sure all the processes
work correctly, for example, so deliveries are
always on time; ensuring that whatever GE’s
proposition to the customer is, it will make
that customer more money; and increasing the
effectiveness of GE’s sales force.”2 Looking ahead,
he seeks new leaders for growth at GE—people
who are passionate about customers and
innovation, people who really know markets and
products.3
1 “Business Biographies: John T. Chambers,” http://www
.answers.com, accessed on June 29, 2008.
2 Eilene Zimmerman, “So You Wanna Be a CEO,” Sales &
Marketing Management (January 2002): pp. 31–35.
3 Patricia O’Connell, “Bringing Innovations to the Home of Six
Sigma,” BusinessWeek Online, August 1, 2005, accessed at http://
www.businessweek.com.
nurture customer relationship management capabilities, which include all the skills
required to identify, initiate, develop, and maintain profitable customer relationships.
Marketing Tasks: What Managers Do To bring the job of business marketing
professionals to life, let’s examine some of the day-to-day assignments they perform.
In customer relationship management, some critical marketing tasks include “identifying and categorizing customer segments; determining a customer’s current and potential needs; visiting customers to learn about the uses and applications of individual
products; developing and executing the individual components of sales, advertising,
promotion, and services programs; assessing price sensitivities; and determining customer response to rivals’ current and potential offerings.”15 Research clearly demonstrates that the customer relationship management process has an important impact
on a firm’s financial performance.
15 Rajendra K. Srivastava, Tasadduq A. Shervauie, and Liam Fahey, “Marketing, Business Processes, and Shareholder
Value: An Organizationally Embedded View of Marketing Activities and the Discipline of Marketing,” Journal of
Marketing 63 (Special Issue, 1999): pp. 168–179.
10
Part I
The Environment of Business Marketing
Profit Focus Developing a firm grasp on the profit impact of marketing strategy
actions is fundamental to the job of a business marketing manager. Included here is
the need to isolate the forces that drive customer profitability, aligning resources spent
on customers to the revenues and profit that will be secured. To this end, Robert S.
Kaplan and David P. Norton assert:
A company that forgets, or never realizes, that it has unprofitable products
and customers in the current period will almost surely continue to incur losses
in unprofitable products and customers in future periods. Having a clear picture about where the company is making money and losing money should be
a vital input to any strategy review.16
Partnering for Increased Value A business marketer becomes a preferred supplier
to major customers such as Apple, Texas Instruments, or Procter & Gamble by working closely as a partner, developing an intimate knowledge of the customer’s operations, and contributing unique value to that customer’s business. Business marketing
programs increasingly involve a customized blend of tangible products, service support, and ongoing information services both before and after the sale. Market-driven
firms place a high priority on customer-linking capabilities and closely align product
decisions—as well as delivery, handling, service, and other supply chain activities—
with the customer’s operations. For firms like Intel or Boeing to deliver maximum
value to their customers, each must receive maximum value from its suppliers. For
instance, Intel could not have achieved its commanding global market share without
the cost, quality, technology, and other advances its suppliers contribute.17
Creating the Customer Value
Proposition18
Business marketing strategy must be based on an assessment of the company, the
competitor, and the customer. A successful strategy focuses on identifying those
opportunities in which the firm can deliver superior value to customers based on its
distinctive competencies. From this perspective, marketing can be best understood as
the process of defining, developing, and delivering value.
Market-driven firms attempt to match their resources, skills, and capabilities with
particular customer needs that are not being adequately served. By understanding
customer needs, marketing managers can define value from the customer’s perspective and convert that information into requirements for creating satisfied customers.
In turn, a firm’s capabilities and skills determine the degree to which the company can
meet these requirements and provide greater value than its competitors.
A business marketing firm’s offering includes many technical, economic, service,
or social benefits that provide value to customers—but so do the offerings of competitors. So, customers compare the value elements of a firm’s offering with those offered
16 Robert S. Kaplan and David P. Norton, The Execution Premium: Linking Strategy to Operations for Competitive Advantage
(Boston, MA: Harvard Business Press, 2008), p. 258.
17 Gina Roos, “Intel Corporation: It Takes Quality to Be Preferred by World’s Biggest Chipmaker,” Purchasing 131
(November 15, 2001): pp. 21–22.
18 James C. Anderson, James A. Narus, and Wouter van Rossum, “Customer Value Propositions in Business Markets,”
Harvard Business Review 84 (March 2006): pp. 91–99.
Chapter 1
A Business Marketing Perspective
11
by the next best alternative.19 A customer value proposition captures the particular
set of benefits that a supplier offers to advance the performance of the customer organization. Rather than merely attempting to list more benefits than competitors, “best
practice suppliers base their value proposition on the few elements that matter most
to target customers, demonstrate the value of this superior performance, and communicate it in a way that conveys a sophisticated understanding of the customer’s business priorities.”20 The building blocks of a successful value proposition include:
• Points of parity—the value elements with essentially the same performance characteristics as the next best alternative;
• Points of difference—the value elements that render the supplier’s offering either
superior or inferior to the next best alternative.
Value Proposition Illustrated Sonoco, a global packaging supplier headquartered in
South Carolina, approached a large European customer, a producer of consumer goods,
about redesigning the packaging for one of its successful product lines. Although the
redesigned packaging provided several favorable points of difference relative to the next
best alternative, Sonoco executives decided to place special emphasis on one point of
parity and two points of difference in the customer value proposition: The redesigned
packaging will deliver significantly greater manufacturing efficiency in the customer’s
fill lines, through higher-speed closing, and provide a distinctive look that customers
will find more appealing—all for the same price as the present packaging.
What Matters Most? A point of parity was included in the value proposition because key buying influentials (those who have power in the buying process) within
the customer organization would not even consider a packaging redesign if the price
increased. The first point of difference in the value proposition (increased efficiency)
delivered cost savings, allowing the customer to dramatically streamline its production schedule. The second point of difference (more distinctive customer packaging)
enhanced the firm’s market position and appeal to its customers, allowing it to realize
meaningful growth in its revenues and profit. While the other favorable points of difference were certainly mentioned in discussions with the customer organization, Sonoco executives chose to emphasize those points that mattered most to the customer.
Marketing’s Cross-Functional Relationships
Rather than operating in isolation from other functional areas, the successful business
marketing manager is an integrator—one who understands manufacturing, research
and development (R&D), and customer service and who applies these strengths in
developing marketing strategies that respond to customer needs.21 Close and tightly
integrated cross-functional relationships underlie the strategy success stories of firms
such as Hewlett-Packard and 3M. As firms adopt leaner and more agile structures
and emphasize cross-functional teams, the business marketing manager assumes an
important and challenging role in strategy formation.
19 Wolfgang Ulaga and Andreas Eggert, “Value-Based Differentiation in Business Relationships: Gaining and Sustaining
Key Supplier Status,” Journal of Marketing 70 (January 2006): pp. 119–136.
20 Anderson, Narus, and van Rossum, “Customer Value Propositions,” p. 93.
21 Michael D. Hutt, “Cross-Functional Working Relationships in Marketing,” Journal of the Academy of Marketing Science 23
(Fall 1995): pp. 351–357.
12
Part I
The Environment of Business Marketing
FIGURE 1.3
Illustrative
Input
Percent of
capital budgeting
requirements and
ROI for a new
product
Accurate cost
history and
forecast of
future costs by
product and
market segment
Responsive
delivery support
consistent with
customer needs
BUSINESS MARKETING PLANNING: A FUNCTIONALLY INTEGRATED PERSPECTIVE
Business
Function
Finance
Accounting
Business
Function
Illustrative
Input
R&D
Concept and product
development
and evaluation
Procurement
Monitoring and
interpretation of
relevant trends in
supply environment
Manufacturing
Forecast of
production costs
at alternative
volume levels
Customer
Service
Provision for
technical service
after the sale
Business
Marketing
Planning
Logistics
Formulation of
Business Marketing
Strategy
Working Relationships A day in the life of a business marketing manager centers
on building relationships with customers and in forging one-to-one relationships with
managers in the firm’s other functional areas. By building effective cross-functional
connections, the marketer is ideally equipped to respond to customers’ changing needs.
Business marketing success depends to a large degree on such functional areas in
the firm as engineering, R&D, manufacturing, and technical service. Planning in the
industrial setting thus requires more functional interdependence and a closer relationship to total corporate strategy than planning in the consumer-goods sector. B. Charles
Ames points out that “changes in marketing strategy are more likely to involve capital
commitments for new equipment, shifts in development activities, or departures from
traditional engineering and manufacturing approaches, any one of which would have
companywide implications.”22 All business marketing decisions—product, price, promotion, and distribution—are affected, directly or indirectly, by other functional areas. In
turn, marketing considerations influence business decisions in R&D and in manufacturing and procurement, as well as adjustments in the overall corporate strategy. Business
marketing planning must be coordinated and synchronized with corresponding planning
efforts in R&D, procurement, finance, production, and other areas (Figure 1.3).
22 B. Charles Ames, “Trappings vs. Substance in Industrial Marketing,” Harvard Business Review 48 (July–August 1976): pp. 95–96.
Chapter 1
A Business Marketing Perspective
13
Characteristics of Business Markets
Business marketing and consumer-goods marketing are different. A common body of
knowledge, principles, and theory applies to both consumer and business marketing,
but because their buyers and markets function quite differently, they merit separate
attention. Consumer and business marketing differ in the nature of markets, market
demand, buyer behavior, buyer-seller relationships, environmental influences (economic,
political, legal), and market strategy. Yet, the potential payoffs are high for the firm that
can successfully penetrate the business market. The nature of the demand for industrial
products poses unique challenges—and opportunities—for the marketing manager.
Derived Demand Derived demand refers to the direct link between the demand
for an industrial product and the demand for consumer products: The demand for industrial products is derived from the ultimate demand for consumer products. Consider the
materials and components used in a Harley-Davidson motorcycle. Harley-Davidson
manufactures some of the components, but the finished product reflects the efforts
of more than 200 suppliers or business marketers who deal directly with the firm. In
purchasing a Harley-Davidson motorcycle, the customer is stimulating the demand
for a diverse array of products manufactured by business marketing firms—such as
tires, electrical components, coil springs, aluminum castings, and other items.
Fluctuating Demand Because demand is derived, the business marketer must carefully monitor demand patterns and changing buying preferences in the household
consumer market, often on a worldwide basis. For example, a decline in mortgage
rates can spark an increase in new home construction and a corresponding increase in
appliance sales. Retailers generally respond by increasing their stock of inventory. As
appliance producers like Maytag increase the rate of production to meet the demand,
business marketers that supply these manufacturers with items such as motors, timers,
or paint experience a surge in sales. A downturn in the economy creates the opposite
result. This explains why the demand for many industrial products tends to fluctuate
more than the demand for consumer products.
Stimulating Demand Some business marketers must not only monitor final consumer markets but also develop a marketing program that reaches the ultimate consumer directly. Aluminum producers use television and magazine ads to point out
the convenience and recycling opportunities that aluminum containers offer to the
consumer—the ultimate consumer influences aluminum demand by purchasing soft
drinks in aluminum, rather than plastic, containers. More than 4 billion pounds of
aluminum are used annually in the production of beverage containers. Similarly,
Boeing promotes the convenience of air travel in a media campaign targeted to the
consumer market to create a favorable environment for longer-term demand for its
planes; DuPont advertises to ultimate consumers to stimulate the sales of carpeting,
which incorporates their product.
Price Sensitivity Demand elasticity refers to the responsiveness of the quantity
demanded to a change in price. Demand is elastic when a given percentage change
in price brings about an even larger percentage change in the quantity demanded.
Inelasticity results when demand is insensitive to price—that is, when the percentage
change in demand is less than the percentage change in price. Consider the demand
for electronic components that is stimulated by companies making electronic games.
14
Part I
The Environment of Business Marketing
As long as final consumers continue to purchase and upgrade these games and are
generally insensitive to price, manufacturers of the equipment are relatively insensitive to the price of electronic components. At the opposite end of the spectrum, if
consumers are price sensitive when purchasing soup and other canned grocery products, manufacturers of soup will be price sensitive when purchasing metal cans. Thus,
the derived demand indicates that the demand for metal cans is price elastic.
Final consumer demand has a pervasive impact on the demand for products in the
business market. By being sensitive to trends in the consumer market, the business
marketer can often identify both impending problems and opportunities for growth
and diversification.
A Global Market Perspective A complete picture of the business market must
include a horizon that stretches beyond the boundaries of the United States. The
demand for many industrial goods and services is growing more rapidly in many foreign countries than in the United States. Countries like Germany, Japan, Korea,
and Brazil offer large and growing markets for many business marketers. In turn,
China and India represent economies with exploding levels of growth. Countless
small firms and many large ones—such as GE, 3M, Intel, Boeing, Dow Chemical,
Caterpillar, and Motorola—derive a significant portion of their sales and profits from
international markets. For example, China plans to invest more than $300 billion over
the next few years in the country’s infrastructure, representing an enormous market
opportunity for all of GE’s industrial businesses, including power generation, health
care, and infrastructure (for example, water purification). For cell phone makers such
as Motorola, China already represents a fiercely competitive market and features the
world’s largest base of subscribers—well over 500 million.23
Global Challengers From China’s Lenovo (computers) and Baosteel to Brazil’s Embraer
(light jets) and Petrobras (petroleum) and from India’s Infosys Technologies (IT services)
to Mexico’s Cemex (building materials), a whole host of formidable rivals are emerging.
The Boston Consulting Group (BCG) identified the 100 largest, most successful, and
most influential firms that have achieved prominence in their rapidly developing markets
and beyond.24 The resulting BCG Challenger 100 list includes firms from 14 countries,
including 41 firms from China, 13 from Brazil, 7 from Mexico, and 6 from Russia. Interestingly, 34 provide industrial goods. Total revenue for the BCG 100 is growing over
30 percent a year and profit margins exceed those of large multinational firms in the
United States, Japan, and Germany. Business-to-business firms must act decisively, compete aggressively, and seize market opportunities in rapidly developing global economies.
Business and Consumer Marketing:
A Contrast
Many consumer-goods companies with a strong reputation in the consumer market decide to capitalize on opportunities they perceive in the business market. The move is often
prompted by a maturing product line, a desire to diversify operations, or the strategic
23 Pete Engardio, “A New World Economy,” Business Week, August 22/29, 2005, pp. 52–58.
24 Harold L. Sirkin, James W. Hemerling, and Arindam K. Bhattacharya, Globality: Competing with Everyone from
Everywhere for Everything (New York: Business Plus, 2008), pp. 23–24.
Chapter 1
A Business Marketing Perspective
15
opportunity to profitably apply R&D or production strength in a rapidly growing business market. P&G, departing from its packaged consumer-goods tradition, is using its
expertise in oils, fats, and pulps to diversify into fast-growing industries.
The J. M. Smucker Company operates successfully in both the consumer and
the business markets. Smucker, drawing on its consumer product base (jellies and
preserves), produces filling mixes used by manufacturers of yogurt and dessert items.
Marketing strawberry preserves to ultimate consumers differs significantly from marketing a strawberry filling to a yogurt manufacturer. Key differences are highlighted
in the following illustration.
Smucker: A Consumer and Business Marketer
Smucker reaches the consumer market with a line of products sold through retail
outlets. New products are carefully developed, tested, targeted, priced, and promoted
for particular market segments. To secure distribution, the firm employs food brokers who call on both wholesale- and retail-buying units. The company’s own sales
force reaches selected larger accounts. Achieving a desired degree of market exposure
and shelf space in key retail food outlets is essential to any marketer of consumer
food products. Promotional plans for the line include media advertising, coupons,
special offers, and incentives for retailers. Pricing decisions must reflect the nature of
demand, costs, and the behavior of competitors. In sum, the marketer must manage
each component of the marketing mix: product, price, promotion, and distribution.
The marketing mix takes on a different form in the business market. Attention
centers on manufacturers that potentially could use Smucker products to produce
other goods; the Smucker product will lose its identity as it is blended into yogurt,
cakes, or cookies. Once Smucker has listed all the potential users of its product (for
example, large food processors, bakeries, yogurt producers), the business marketing
manager attempts to identify meaningful market segments that Smucker can profitably serve. A specific marketing strategy is developed for each market segment.
When a potential organizational consumer is identified, the company’s sales force
calls directly on the account. The salesperson may begin by contacting a company
president but, at first, generally spends a great deal of time with the R&D director or
the product-development group leader. The salesperson is thus challenged to identify
the key buying influentials—those who have power in the buying process. Seniorlevel Smucker executives may also assist in the selling process.
Armed with product specifications (for example, desired taste, color, calories),
the salesperson returns to the Smucker R&D department to develop samples. Several
months may pass before a mixture is finally approved. Next, attention turns to price,
and the salesperson’s contact point shifts to the purchasing department. Because large
quantities (truckloads or drums rather than jars) are involved, a few cents per pound
can be significant to both parties. Quality and service are also vitally important.
Once a transaction is culminated, the product is shipped directly from the
Smucker warehouse to the manufacturer’s plant. The salesperson follows up frequently with the purchasing agent, the plant manager, and other executives. Product
movement and delivery information is openly shared, and close working relationships
develop between managers at Smucker and key decision makers in the buying organization. How much business can Smucker expect from this account? The performance
of the new consumer product in the marketplace determines this: The demand for
industrial goods is, as noted, derived from ultimate consumer demand. Note also the
16
Part I
The Environment of Business Marketing
importance of (1) developing a close and continuing working relationship with business market customers and (2) understanding the requirements of the total range of
buying influentials in the target company.
Distinguishing Characteristics
The Smucker illustration spotlights some of the features that differentiate business
marketing strategy from consumer-goods marketing strategy. The business marketer
emphasizes personal selling rather than advertising (TV, newspaper) to reach potential buyers. Only a small portion of the business marketer’s promotional budget is
likely to be invested in advertising, most commonly through trade journals or direct
mail. This advertising, however, often establishes the foundation for a successful sales
call. The industrial salesperson must understand the technical aspects of the organization’s requirements and how those requirements can be satisfied, as well as know who
influences the buying decision and why.
The business marketer’s product also includes an important service component. The
organizational consumer evaluates the quality of the physical product and the quality of
the attached services. Attention centers on the total package of benefits the consumer receives. Price negotiation is frequently an important part of the industrial buying/selling
process. Products made to particular quality or design specifications must be individually priced. Business marketers generally find that direct distribution to larger customers
strengthens relationships between buyer and seller. Smaller accounts can be profitably
served through intermediaries—manufacturers’ representatives or industrial distributors.
As the Smucker example illustrates, business marketing strategies differ from consumer-goods marketing strategies in the relative emphasis given to certain elements of
the marketing mix. It is important to note that the example also highlights fundamental
differences between the buyers in each market. In an organization, a variety of individuals influence the purchase decision. Several major questions confront Smucker’s business
marketing manager: Who are key participants in the purchasing process? What is their
relative importance? What criteria does each apply to the decision? Thus, the business
marketer must understand the process an organization follows in purchasing a product
and identify which organizational members have roles in this process. Depending on the
complexity of the purchase, this process may span many weeks or months and may involve the participation of several organization members. The business marketer who becomes involved in the purchase process early may have the greatest chance for success.
A Relationship Emphasis
Relationships in the business market are often close and enduring. Rather than constituting the end result, a sale signals the beginning of a relationship. By convincing
a large food processor such as General Foods to use its product, Smucker initiates a
potential long-term business relationship. More than ringing up a sale, Smucker creates a customer! To maintain that relationship, the business marketer must develop
an intimate knowledge of the customer’s operations and contribute unique value to its
business. Relationship marketing centers on all marketing activities directed toward
establishing, developing, and maintaining successful exchanges with customers.25
25 Robert M. Morgan and Shelby D. Hunt, “The Commitment-Trust Theory of Relationship Marketing,” Journal of
Marketing 58 (July 1994): pp. 20–38.
Chapter 1
FIGURE 1.4
A Business Marketing Perspective
17
CHARACTERISTICS OF BUSINESS MARKET CUSTOMERS
Characteristic
Example
• Business market customers are comprised
of commercial enterprises, institutions, and
governments.
• Among Dell’s customers are Boeing,
Arizona State University, and numerous
state and local government units.
• A single purchase by a business customer is
far larger than that of an individual consumer.
• An individual may buy one unit of a software
package upgrade from Microsoft while
Citigroup purchases 10,000.
• The demand for industrial products is derived
from the ultimate demand for consumer products.
• New home purchases stimulate the demand for
carpeting, appliances, cabinets, lumber, and a
wealth of other products.
• Relationships between business marketers
tend to be close and enduring.
• IBM’s relationship with some key customers
spans decades.
• Buying decisions by business customers often
involve multiple buying influences, rather than a
single decision maker.
• A cross-functional team at Procter & Gamble
(P&G) evaluates alternative laptop personal
computers and selects Hewlett-Packard.
• While serving different types of customers,
business marketers and consumer-goods
marketers share the same job titles.
• Job titles include marketing manager, product
manager, sales manager, account manager.
Building one-to-one relationships with customers is the heart of business marketing.
Figure 1.4 provides a recap of key characteristics of business market customers.
The Supply Chain
Figure 1.5 further illuminates the importance of a relationship perspective in business marketing by considering the chain of suppliers involved in the creation of an
automobile. Consider Honda Motor Company. At its Marysville, Ohio, auto assembly plant, Honda introduced many new concepts to the U.S. auto industry, including just-in-time parts delivery and a high level of flexible model construction. For
instance, the Ohio plant can readily shift from the Acura TL luxury sedan to the
Accord, based on customer demand.26 A new small-car plant in Indiana gives Honda
further capacity to make Civic- and Accord-size vehicles—fuel-efficient models
particularly coveted by auto buyers as gas prices increase. Across its seven plants in
North America, Honda annually purchases more than $17 billion of parts and materials from U.S. suppliers.27
The relationships between the auto producers and their suppliers fall squarely into
the business marketing domain. Similarly, business marketers such as TRW rely on a
26 Tom Krisher, “Honda Grows While U.S. Auto Industry Falters,” accessed at http://biz.yahoo.com on July 2, 2008.
27 “Honda’s First U.S. Auto Plant Celebrates 25 Years of Production,” November 1, 2007, accessed at http://www.world.
honda.com on July 2, 2008.
18
Part I
FIGURE 1.5
The Environment of Business Marketing
THE SUPPLY CHAIN
Upstream Suppliers
(USX, DuPont)
Suppliers of
manufactured
materials and
parts such as
sheet metal or
plastic resin
Direct Suppliers
(TRW, Johnson
Controls)
Purchase input
used in creating
power-steering
systems (TRW) or
car seats (Johnson
Controls)
Business Marketing
Auto Manufacturers
(Ford, General Motors)
Auto Buyers
(Consumers)
Purchase input
used in creating
automobiles
Purchase
automobiles
Business Marketing
Consumer Marketing
(Individuals, Households)
and
Business Marketing
(Organizations such as
Fleet Buyers)
whole host of others farther back on the supply chain for raw materials, components, and
other support. Each organization in this chain is involved in the creation of a product,
marketing processes (including delivery), and support and service after the sale. In performing these value-creating activities, each also affects the quality level of the Honda
product. Michael Porter and Victor Millar observe that “to gain competitive advantage
over its rivals, a company must either perform these activities at a lower cost or perform
them in a way that leads to differentiation and a premium price (more value).”28
Supply Chain Management
Supply chain management is a technique for linking a manufacturer’s operations
with those of all of its strategic suppliers and its key intermediaries and customers
to enhance efficiency and effectiveness. The Internet allows members of the supply chain all over the world to exchange timely information, exchange engineering
drawings during new product development, and synchronize production and delivery schedules. The goal of supply chain strategy is to improve the speed, precision,
and efficiency of manufacturing through strong supplier relationships. This goal is
achieved through information sharing, joint planning, shared technology, and shared
benefits. If the business marketer can become a valued partner in a customer’s supply chain, the rewards are substantial: The focus shifts from price to value and from
products to solutions.29 To achieve these results, the business marketing firm must
28 Michael E. Porter and Victor E. Millar, “How Information Gives You Competitive Advantage,” Harvard Business
Review 63 (July–August 1985): pp. 149–160; see also Michael E. Porter, Competitive Advantage (New York: The Free
Press, 1985).
29 Marc Bourde, Charlie Hawker, and Theo Theocharides, “Taking Center Stage: The 2005 Chief Procurement Officer
Survey” (Sommers, NY: IBM Global Services, 2005), pp. 1–13, accessed at http://www.ibm.com on July 15, 2005.
Chapter 1
A Business Marketing Perspective
19
demonstrate the ability to meet the customer’s precise quality, delivery, service, and
information requirements.
Managing Relationships in the Supply Chain
Customers in the business market place a premium on the business marketer’s supply chain
management capabilities. IBM spends 85 percent of its purchasing dollars with 50 suppliers.30 Of particular importance to IBM is the quality of engineering support it receives from
suppliers. IBM actively seeks supplier partners that will contribute fresh ideas, responsive
service, and leading-edge technology to attract buyers of future IBM products.
Similarly, Toyota excels at creating and sustaining supplier relationships. In fact,
executives across industries want to emulate Toyota’s success in creating a base of
suppliers who are unshakably loyal, committed to continuous improvement, and drive
superior financial performance. Malte Kalkoffen and colleagues at the Boston Consulting Group undertook a broad study to uncover the factors that set Toyota apart
from the rest of the industry.31 The results reveal valuable insights into the strategy
path a business marketing manager can follow to develop and sustain a long-term relationship with a world-class customer like Toyota.
How Toyota Builds Distinctive Supplier Relationships Suppliers consistently
rank Toyota as the preferred customer among the auto manufacturers. Why? “Toyota
allows them acceptable returns on their investments, is reliable in honoring its contract price agreements, supports suppliers in improving their operations, and provides
an equitable split of any cost reductions they achieve. The fundamental principle . . .
is simple but profound: treat all suppliers fairly.”32
Three other principles guide Toyota’s approach to supplier relations:
1. The company imposes stringent selection criteria to ensure that every supplier
meets Toyota’s requirements in terms of cost, quality, and technology.
Importantly, Toyota will select only those suppliers that are willing to establish
long-term partnerships with the company.
2. The company retains critical new product development (NPD) and design
knowledge in-house but uses a streamlined NPD process that features frequent
interactions with suppliers to leverage their expertise and increase productivity
for Toyota and suppliers alike.
3. Once an ongoing relationship with a supplier has been established, Toyota
takes responsibility for helping that supplier firm to develop its capabilities
and grow its business. For example, Toyota monitors the performance of its
suppliers to an extensive degree, insisting that senior executives of each supplier
organization be responsible for quality and performance outcomes. In turn,
Toyota performs semiannual quality audits and provides consulting assistance
and access to knowledge-sharing networks to enhance its suppliers’ capabilities.
30 James Carbone, “Reinventing Purchasing Wins Medal for Big Blue,” Purchasing 129 (September 16, 1999): pp. 45–46.
31 The following discussion is based on: Malte Kalkoffen, Zafar Momin, Xavier Mosquet, Jagjit Singh, and George
Sticher, “Getting to Win-Win: How Toyota Creates and Sustains Best-Practice Supplier Relationships,” The Boston
Consulting Group, Inc., September 2007, pp. 1–10, accessed at http://www.bcg.com on May 25, 2008.
32 Ibid., p. 1.
20
Part I
FIGURE 1.6
“When working
with Toyota, you
can never be
satisfied with the
status quo – you
need to always
work on doing
things better.”
- a German
supplier in Japan
The Environment of Business Marketing
SUPPLIERS’ PHILOSOPHY MUST FIT WITH TOYOTA’S
Kaizen
∞ Commitment to
continuously
improving
performance
∞
“Toyota is very
well coordinated
internally. Every
function at
Toyota is aware
of all interactions
with us, even
when it is only
related to one
particular topic.
Toyota expects
the same from
us.”
- a Thai supplier
Willingness to analyze
root causes for all
problems and correct
them
Consistent reasoning
∞ A factual basis for all decisions
∞ Deep understanding of the
reasons behind each product
design decision
Cross-functional
teaming
∞ A teambased
working
culture
∞
Sharing of information and
knowledge
∞ Willingness to share
details on costs,
quality, and
technology
∞
The
involvement
of management
in all operational
matters
Responsiveness
∞ Prompt replies to all
requests
∞ Reliable delivery of
whatever is promised
“Toyota
engineers are
very detail
oriented, and
they constantly
ask very specific
questions. They
want to
understand the
reasoning behind
every product
specification.”
– a European
supplier
“When Toyota
has a request for
you, they expect
a response as
soon as possible,
even if it is over
the weekend.”
- a German
supplier
Transparency and
openness in all
discussions
SOURCE: Malte Kalkoffen, Zafar Momin, Xavier Mosquet, Jagjit Singh, and George Sticher, “Getting to Win-Win: How Toyota Creates
and Sustains Best-Practice Supplier Relationships,” The Boston Consulting Group, Inc., September 2007, p. 4; accessed at http://www.bcg
.com on May 25, 2008. All rights reserved. Reproduced by permission.
Winning with Toyota Toyota seeks those suppliers that can provide industry leadership on cost, quality, and technology. Likewise, potential suppliers must demonstrate a willingness to pursue a long-term partnership, and the philosophy that guides
the supplier firm must be aligned with Toyota’s culture. In evaluating a supplier’s
philosophical fit, five specific elements are explored: Kaizen (or continuous improvement), consistent reasoning, cross-functional teaming, sharing of information and
knowledge, and responsiveness (see Figure 1.6). The selection process is based on
Toyota’s belief that long-term relationships with familiar suppliers reduces transaction costs and creates more value than short-term ones.
Developing and nurturing close, long-term relationships with customers is an important goal for the business marketer. Built on trust and demonstrated performance, these
partnerships require open lines of communication between multiple layers of the buying
and selling organizations. Quotes from business marketing executives who count Toyota
as a strategic partner (customer), illustrate the nature of long-term relationships:33
“Toyota is tough as hell in negotiations, and we have to share every detail of
our data with them—but they are fair, and they know that if we don’t make
money, we can’t innovate for them.”
“Toyota helped us dramatically improve our production system. We started
by making one component, and as we improved, Toyota rewarded us with
orders for more components. Toyota is our best customer.”
33 Ibid., p. 8.
Chapter 1
A Business Marketing Perspective
21
Commercial Enterprises as Consumers
Business market customers, as noted at the outset of the chapter, can be broadly classified into three categories: (1) commercial enterprises, (2) governmental organizations, and (3) institutions. Each is explored in Chapter 2. However, the supply chain
concept provides a solid foundation for describing the commercial customers that
constitute the business market. Commercial enterprises can be divided into three categories: (1) users, (2) original equipment manufacturers (OEMs), and (3) dealers and
distributors.
Users Users purchase industrial products or services to produce other goods or
services that are, in turn, sold in the business or consumer markets. User customers purchase goods—such as computers, photocopiers, or automated manufacturing
systems—to set up or support the manufacturing process. When purchasing machine
tools from GE, an auto manufacturer is a user. These machine tools do not become
part of the automobile but instead help to produce it.
Original Equipment Manufacturers (OEMs) The OEM purchases industrial
goods to incorporate into other products it sells in the business or ultimate consumer
market. For example, Intel Corporation produces the microprocessors that constitute
the heart of Dell’s personal computer. In purchasing these microprocessors, Dell is
an OEM. Likewise, Apple is an OEM in purchasing a touch-screen controller from
Broadcom Corp.—about $4 to $5 of content in every iPhone.34
Dealers and Distributors Dealers and distributors include commercial enterprises
that purchase industrial goods for resale (in basically the same form) to users and
OEMs. The distributor accumulates, stores, and sells a large assortment of goods to
industrial users, assuming title to the goods it purchases. Handling billions of dollars worth of transactions each year, industrial distributors are growing in size and
sophistication. The strategic role assumed by distributors in the business market is
examined in detail in Chapter 11 (Channels).
Overlap of Categories The three categories of commercial enterprises are not
mutually exclusive. Their classification is based on the intended purpose the product
serves for the customer. Ford is a user when purchasing a machine tool for the manufacturing process, but the same company is an OEM when purchasing radios to be
installed in the ultimate consumer product.
A marketer must have a good understanding of the diverse organizational consumers that make up the business market. Properly classifying commercial customers
as users, OEMs, or dealers or distributors is an important first step to a sharpened
understanding of the buying criteria that a particular commercial customer uses in
evaluating an industrial product.
Understanding Buying Motivations Consider the different types of commercial customers that purchase a particular industrial product such as electrical timing
mechanisms. Each class of customer views the product differently because each purchases the product for a different reason.
34 Eric J. Savitz, “Battle for Smartphone Market Share Pressures Margins,” Barron’s, June 30, 2008, p. 37.
22
Part I
The Environment of Business Marketing
INSIDE BUSINESS MARKETING
The iPhone: A Triumph of Supply Chain Management Too1
Creating an immediate buzz among consumers
around the world, Apple’s iPhone was judged a
triumph of design and flexibility, not to mention
a cool, must-have product, before the first unit
was sold. However, “a killer product is only
successful if it gets to the right customer at the
right price at the right time.”2 Many firms fail to
reap the rewards of product innovation because
they stumble on quality or fail to meet demand,
disappointing loyal customers. In addition to
demonstrating superior capabilities in new product
development and marketing strategy execution,
Apple excels at supply chain management.
In its annual Supply Chain Top 25, AMR
Research awarded Apple the number-one ranking
among a formidable set of top-performing firms,
such as Nokia, IBM, Procter & Gamble, Cisco, and
Nike. The AMR Research report notes that the
leading-edge performance of Apple “signifies an
epic shift away from the 20th Century productionefficiency mentality to a new era based on ideas,
design, and content. The iPhone maker took the
top spot due to a sophisticated mix of brilliant
industrial design, transcendent software interfaces,
and consumable goods that are entirely digital.”
This approach provides financial benefits in the
form of extremely high inventory turns, minimal
material or capacity limitations, and excellent profit
margins. By forecasting demand accurately and
synchronizing communication across the supply
chain, Apple met the demands of its rabid fan base.
1 Unless otherwise noted, this discussion is based on Thomas
Wailgum, “Study: Apple, Nokia, Dell Top Among Global Supply Chains,” CIO, May 29, 2008, accessed at http://www.cio
.com on July 4, 2008.
2 Bob Trebilcock, “Supply Chain Lessons from iPhone,” Modern
Materials Handling, July 27, 2007, accessed at http://www.mmh
.com on July 4, 2008.
A food-processing firm such as Pillsbury buys electrical timers for use in a
high-speed canning system. For this customer, quality, reliability, and prompt and
predictable delivery are critical. Whirlpool, an OEM that incorporates the industrial
product directly into consumer appliances, is concerned with the effect of the timers
on the quality and dependability of the final consumer product. Because the timers
are needed in large quantities, the appliance manufacturer is also concerned about
the producer’s production capacity and delivery reliability. Finally, an industrial distributor is most interested in matching the capability of the timing mechanisms to the
needs of customers (users and OEMs) in a specific geographical market.
Classifying Goods for the Business
Market35
Having classified business market customers, we must now ask what type of goods
they require, and how each type is marketed. One useful method of classifying industrial goods is to ask the following questions: How does the industrial good or
service enter the production process, and how does it enter the cost structure of the
firm? The answer enables the marketer to identify those who are influential in the
organizational buying process and to understand how to design an effective business
marketing strategy. In general, industrial goods can be divided into three broad categories: entering goods, foundation goods, and facilitating goods (Figure 1.7).
35 Data on the dollar purchases of particular products by selected customers are drawn from Anne Millen Porter and Elena
Epatko Murphy, “Hey Big Spender . . . The 100 Largest Industrial Buyers,” Purchasing (November 9, 1995): pp. 31–42.
Chapter 1
A Business Marketing Perspective
23
CLASSIFYING GOODS FOR THE BUSINESS MARKET
FIGURE 1.7
ENTERING GOODS
FOUNDATION GOODS
Raw Materials
Installations
– Farm Products
(e.g., wheat)
– Buildings & Land Rights
(e.g., offices)
– Natural Products
(e.g., iron ore, lumber)
– Fixed Equipment
(e.g., computers, elevators)
Manufactured Materials & Parts
Accessory Equipment
– Component Materials
(e.g., steel)
– Light Factory Equipment
(e.g., lift trucks)
– Component Parts
(e.g., tires, microchips)
– Office Equipment
(e.g., desks, pc's)
FACILITATING GOODS
Supplies
– Operating Supplies
(e.g., lubricants, paper)
– Maintenance & Repair Items
(e.g., paint, screws)
Business Services
– Maintenance & Repair Services
(e.g., computer repair)
– Business Advisory Services
(e.g., legal, advertising,
management consulting)
SOURCE: Adapted from Philip Kotler, Marketing Management: Analysis, Planning, and Control, 4th ed. (Englewood Cliffs, N.J.: Prentice-Hall,
1980), p. 172, with permission of Prentice-Hall, Inc.
Entering Goods
Entering goods become part of the finished product. This category of goods consists
of raw materials and manufactured materials and parts. Their cost is an expense item
assigned to the manufacturing process.
24
Part I
The Environment of Business Marketing
Raw Materials Observe in Figure 1.7 that raw materials include both farm products and natural products. Raw materials are processed only to the level required for
economical handling and transport; they basically enter the buying organization’s
production process in their natural state. Fueled by the massive growth in the Chinese economy, Freeport-McMoRan Copper & Gold Inc., the copper producer, has
seen demand surge. McDonald’s uses more than 700 million pounds of potatoes
each year and dictates the fortunes of many farmers in that agricultural segment. In
fact, when attempting to introduce a raspberry sorbet, McDonald’s found, to its surprise, that not enough raspberries were being grown!36
Manufactured Materials and Parts In contrast to raw materials, manufactured materials and parts undergo more initial processing. Component materials such as textiles
or sheet steel have been processed before reaching a clothing manufacturer or automaker
but must be processed further before becoming part of the finished consumer product.
Both Ford and GE spend more than $900 million annually on steel. Component parts,
on the other hand, include small motors, motorcycle tires, and automobile batteries; they
can be installed directly into another product with little or no additional processing. For
example, Black & Decker spends $100 million each year on plastic parts, and Sun Microsystems spends more than $200 million on displays and monitors.
Foundation Goods
The distinguishing characteristic of foundation goods is that they are capital items. As
capital goods are used up or worn out, a portion of their original cost is assigned to
the production process as a depreciation expense. Foundation goods include installations and accessory equipment.
Installations Installations include the major long-term investment items that underlie the manufacturing process, such as buildings, land rights, and fixed equipment.
Large computers and machine tools are examples of fixed equipment. The demand for
installations is shaped by the economic climate (for example, favorable interest rates)
but is driven by the market outlook for a firm’s products. In the face of strong worldwide demand for its microprocessors, Intel is building new plants, expanding existing
ones, and making significant investments in capital equipment. A typical semiconductor chip plant costs at least $3 billion to build, equipment accounting for $600 million
of the cost and the land and building account for the rest.37
Accessory Equipment Accessory equipment is generally less expensive and is
short-lived compared with installations, and it is not considered part of the fixed plant.
This equipment can be found in the plant as well as in the office. Portable drills, personal computers, and fax machines illustrate this category.
Facilitating Goods
Facilitating goods are the supplies and services (see Figure 1.7) that support organizational operations. Because these goods do not enter the production process or become
part of the finished product, their costs are handled as expense items.
36 James Brian Quinn, Intelligent Enterprise: A Knowledge and Service Based Paradigm for Industry (New York: The
Free Press, 1992), p. 20.
37 Dean Takahashi, “Makers of Chip Equipment Beginning to Share the Pain,” The Wall Street Journal, August 14, 1996, p. B6.
Chapter 1
A Business Marketing Perspective
25
Supplies Virtually every organization requires operating supplies, such as printer
cartridges, paper, or business forms, and maintenance and repair items, such as paint
and cleaning materials. These items generally reach a broad cross-section of industrial users. In fact, they are very similar to the kinds of supplies that consumers might
purchase at a hardware or discount store.
For example, along with products specifically designed for commercial use,
Procter & Gamble (P&G) sells adaptations of its well-known consumer products in
its professional division.38 Targeting the business market, customers here include
hotels, fast-food restaurants, retailers, and health-care organizations. P&G senses a
huge market opportunity—the U.S. market for janitorial and housekeeping cleaning
products exceeds $3.2 billion annually.
Services Says analyst James Brian Quinn, “As the service sector has grown to embrace 80 percent of all U.S. employment, specialized service firms have become very
large and sophisticated relative to the scale and expertise that individual staff and
service groups have within integrated companies.”39 To capture the skills of these
specialists and to direct attention to what they do best, many firms are shifting or “outsourcing” selected service functions to outside suppliers. This opens up opportunities
for firms that provide such services as computer support, payroll processing, logistics,
food operations, and equipment maintenance. These specialists possess a level of expertise or efficiency that organizations can profitably tap. For example, Cisco Systems
turned to FedEx to coordinate the movement of parts through its supply chain and
on to the customer. By merging the parts shipments in transit for a single customer,
the desired product can be assembled at the customer’s location, never spending a
moment in a Cisco warehouse.40 Business services include maintenance and repair
support (for example, machine repair) and advisory support (for example, management consulting or information management). Like supplies, services are considered
expense items.
Moreover, the explosive growth of the Internet has increased the demand for a
range of electronic commerce services, from Web site design to the complete hosting of an e-commerce site. The Internet also provides a powerful new channel for
delivering technical support, customer training, and advertising. For example, Intel
is shifting over half of its advertising budget to online media and is asking its partners in the “Intel Inside” cooperative ad campaign, like Sony, to increase spending
on online media.41 In turn, the Internet provides the opportunity to manage a particular activity or function from a remote, or even offshore, location. To illustrate,
IBM manages the procurement functions for United Technologies Corporation via
the Web.42
38 Ellen Byron, “Aiming to Clean Up, P&G Courts Business Customers,” The Wall Street Journal, January 26, 2007,
pp. B1–B2.
39 James Brian Quinn, “Strategic Outsourcing: Leveraging Knowledge Capabilities,” Sloan Management Review 40
(Summer 1999): p. 9; see also, Mark Gottfredson, Rudy Puryear, and Stephen Phillips, “Strategic Sourcing: From
Periphery to Core,” Harvard Business Review 83 (February 2005): pp. 132–139.
40 Douglas A. Blackman, “Overnight, Everything Changed for FedEx: Can It Reinvent Itself ?” The Wall Street Journal,
November 4, 1999, pp. A1, A16.
41 Stuart Elliot, “As Customers Flock to the Web, Intel Gives Chase with Its Ad Budget,” The New York Times, October 10,
2007, p. C9.
42 Ira Sager, “Inside IBM: Internet Business Machines,” Business Week E.Biz, December 13, 1999, pp. ED21–23.
26
Part I
The Environment of Business Marketing
Business Marketing Strategy
Marketing pattern differences reveal the significance of a goods classification system.
A marketing strategy appropriate for one category of goods may be entirely unsuitable
for another. Often, entirely different promotional, pricing, and distribution strategies
are required. The physical nature of the industrial good and its intended use by the
organizational customer dictate to an important degree the marketing program’s requirements. Some strategy highlights follow.
Illustration: Manufactured Materials and Parts
Recall that manufactured materials and parts enter the buying organization’s own
product. Whether a part is standardized or customized often dictates the nature of
marketing strategy. For custom-made parts, personal selling and customer relationship management activities assume an important role in marketing strategy. The value
proposition centers on providing a product that advances the customer’s competitive
position. The business marketer must also demonstrate strong supply chain capabilities. Standardized parts are typically purchased in larger quantities on a contractual
basis, and the marketing strategy centers on providing a competitive price, reliable
delivery, and supporting services. Frequently, industrial distributors are used to provide responsive delivery service to smaller accounts.
For manufactured materials and parts, the marketer’s challenge is to locate and
accurately define the unique needs of diverse customers, uncover key buying influentials, and create solutions to serve these customers profitably.
Illustration: Installations
Installations such as fixed equipment were classified earlier as foundation goods because they are capital assets that affect the buyer’s scale of operations. Here the product or technology itself, along with the service capabilities of the firm, are the central
factors in marketing strategy, and direct manufacturer-to-user channels of distribution are the norm. Less costly, more standardized installations such as a drill press
may be sold through marketing intermediaries.
Once again, personal selling or account management is the dominant promotional
tool. The salesperson or account team works closely with prospective organizational buyers. Negotiations can span several months and involve the top executives in the buying
organization, especially for buildings or custom-made equipment. Customer buying motives center on economic factors (such as the projected performance of the capital asset)
and emotional factors (such as industry leadership). A buyer may be quite willing to select
a higher-priced installation if the projected return on investment supports the decision.
The focal points for the marketing of installations include a strong customer relationship
management effort, effective engineering and product design support, and the ability to
offer a product or technology solution that provides a higher return on investment than
its competition. Initial price, distribution, and advertising play lesser roles.
Illustration: Supplies
The final illustration centers on a facilitating good: supplies. Again we find different marketing patterns. Most supply items reach a broad market of organizational
Chapter 1
A Business Marketing Perspective
27
customers from many different industries. Although some large users are serviced
directly, a wide variety of marketing intermediaries are required to cover this broad
and diverse market adequately.
The goal of the business marketer is to secure a place on the purchasing function’s list of preferred or preapproved suppliers. Importantly, many firms are adopting e-procurement systems to dramatically streamline the process employees follow
in buying supplies and other operating resources. From the desktop, an employee
simply logs on to the system, selects the needed items from an electronic catalog
of suppliers the purchasing function has preapproved, and sends the order directly to
the supplier.
For supplies, the marketer’s promotional mix includes catalog listings, advertising, and, to a lesser extent, personal selling. Advertising is directed to resellers (industrial distributors) and final users. Personal selling is less important for supplies
than it is for other categories of goods with a high unit value, such as installations.
Thus, personal selling efforts may be confined to resellers and large users of supplies.
Price may be critical in the marketing strategy because many supply items are undifferentiated. However, customized service strategies might be designed to differentiate
a firm’s offerings from those of competitors. By providing the right product assortment, timely and reliable delivery, and customized services, the business marketer
may be able to provide distinctive value to the customer and develop a long-term,
profitable relationship.
A Look Ahead
Figure 1.8 shows the chief components of the business marketing management
process. Business marketing strategy is formulated within the boundaries established
by the corporate mission and objectives. A corporation determining its mission must
define its business and purpose, assess environmental trends, and evaluate its strengths
and weaknesses. Building e-commerce capabilities and transforming these capabilities
into offerings that provide superior customer value constitute vital corporate objectives at leading organizations like GE. Corporate objectives provide guidelines for
forming specific marketing objectives. Business marketing planning must be coordinated and synchronized with corresponding planning efforts in R&D, procurement,
finance, production, customer service, and other areas. Clearly, strategic plans emerge
out of a bargaining process among functional areas. Managing conflict, promoting
cooperation, and developing coordinated strategies are all fundamental to the business marketer’s interdisciplinary role.
The business marketing management framework (see Figure 1.8) provides an
overview of the five major parts of the text. This chapter introduced some of the
features that distinguish industrial from consumer-goods marketing; the next chapter
explores the major types of customers that make up the business market: commercial enterprises, governmental units, and institutions. Each sector represents a sizable
market opportunity, presents special characteristics and needs, and requires a unique
marketing strategy response.
Part II examines the organizational buying process and the myriad forces that
affect the organizational decision maker. Occupying a central position in Part II
is customer relationship management—a managerial process that leading firms in
business-to-business marketing have mastered. Here special attention is given to
Part I
FIGURE 1.8
The Environment of Business Marketing
A FRAMEWORK FOR BUSINESS MARKETING MANAGEMENT
Corporate Mission and
Objectives
Assess Market
Opportunities
Plan
for and
Acquire
Marketing
Information
Commercial
Market
Government
Market
Institutional
Market
Analyze
Organizational
Buying
Behavior
Select
Target Market
Segments
Evaluate
Alternative
Market
Segments
Monitor
and
Predict
Environmental
Influences
(e.g., Economic, Political,
Technological, Competitive)
Domestic and International
Marketing Objectives
Strategy Development
nal
Pricing
Personal
Selling
Advertising
Sales
Promotion
inat
ion
e nt
Channels of
Distribution
ctio n
P rodu
Marketing Program
O th
em
Product
or Service
Coord
er
tom
C us er vice
S
Inte
r fu
n
Formulate the Business Marketing Mix
ctio
R&D
28
er
P ro
cu r
Response of
Target Market Segments
Evaluation and Control
the specific strategies that business marketers can follow in developing profitable
relationships with customers. Part III turns to the selection of target segments and
specific techniques for measuring the response of these segments. Part IV centers
on designing market-driven strategies. Each component of the marketing mix is
treated from the business marketing perspective. Special attention is given to creating and managing offerings and managing connections, including treatment of
e-commerce and supply chain strategies. Particular emphasis is also given to defining value from the customer’s perspective and developing responsive pricing, advertising, and personal selling strategies to deliver that value proposition to target
segments.
The processes of implementing, monitoring, and controlling the marketing
program are analyzed in Part V. A central theme is how business marketing managers can enhance profi tability by maximizing the return on marketing strategy
expenditures.
Chapter 1
A Business Marketing Perspective
29
Summary
The business market offers significant opportunities and special challenges for the marketing manager. Market-driven firms in the business market demonstrate superior skill
for understanding and satisfying customers. They also possess strong market-sensing
and customer-linking capabilities. To deliver strong financial performance, businessto-business firms must also demonstrate customer relationship management skills,
which include all the skills required to identify, initiate, develop, and monitor profitable customer relationships. Best-practice marketing strategists base their value propositions on the points of difference that matter the most to target customers, responding
clearly and directly to the customer’s business priorities. Although a common body of
knowledge and theory spans all of marketing, important differences exist between consumer and business marketing, among them the nature of markets, demand patterns,
buyer behavior, and buyer-seller relationships.
The dramatic worldwide rise in competition requires a global perspective on markets. To secure a competitive advantage in this challenging environment, business market customers are developing closer, more collaborative ties with fewer suppliers than
they have used in the past. They are using the Internet to promote efficiency and realtime communication across the supply chain and demanding quality and speed from
their suppliers to an unprecedented degree. These important trends in procurement
place a premium on the supply chain management capabilities of the business marketer.
Business marketing programs increasingly involve a customized blend of tangible products, service support, and ongoing information services both before and after the sale.
Customer relationship management constitutes the heart of business marketing.
The diverse organizations that make up the business market can be broadly
divided into (1) commercial enterprises, (2) governmental organizations, and
(3) institutions. Because purchases these organizational consumers make are linked to
goods and services they generate in turn, derived demand is an important and often
volatile force in the business market. Industrial goods can be classified into three categories, based on how the product enters the buying organization’s cost structure and
the production process: (1) entering goods, (2) foundation goods, and (3) facilitating
goods. Specific categories of goods may require unique marketing programs.
Discussion Questions
1. Home Depot is quite busy each morning because local contractors,
home remodelers, and other small-business customers are buying
the products they require for the day’s projects. Such small-business
customers represent a huge market opportunity for Home Depot or
Lowe’s. Describe particular strategies these retailers could follow to
target and serve these customers.
2. DuPont, one of the largest industrial producers of chemicals and
synthetic fibers, spends millions of dollars annually on advertising its
products to final consumers. For example, DuPont invested more than
$1 million in a TV advertising blitz that emphasized the comfort of
jeans made of DuPont’s stretch polyester-cotton blend. DuPont does
not produce jeans or market them to final consumers, so why were large
expenditures made on consumer advertising?
30
Part I
The Environment of Business Marketing
3. What are the chief differences between consumer-goods marketing and
business marketing? Use the following matrix as a guide in organizing
your response:
Consumer-Goods
Marketing
Business Marketing
Customers
Buying Behavior
Buyer–Seller Relationship
Product
Price
Promotion
Channels
4. Explain how a company such as GE might be classified by some business
marketers as a user customer but by others as an OEM customer.
5. Spending a day in the life of a marketing manager would demonstrate
the critical importance of relationship management skills as that
manager interacts with employees of other functional areas and, indeed,
with representatives from both customer and supplier organizations.
Explore the strategic significance of such relationships.
6. Describe the key elements of a customer value proposition. Next, explain
how a compelling value proposition might include points of parity as well
as points of difference.
7. Consumer products are frequently classified as convenience, shopping,
or specialty goods. This classification system is based on how consumers
shop for particular products. Would this classification scheme apply
equally well in the business marketing environment?
8. Evaluate this statement: “The ways that leading companies manage time in
the supply chain—in new product development, in production, in sales and
distribution—are the most powerful new sources of competitive advantage.”
9. Evaluate this statement: “The demand for major equipment (a foundation
good) is likely to be less responsive to shifts in price than that for materials,
supplies, and components.” Do you agree or disagree? Support your position.
10. Many firms are shifting selected service functions to outside suppliers.
For example, Harley-Davidson recently outsourced its transportation
department function to UPS Supply Chain Solutions. What factors
would prompt such a decision, and what criteria would a customer like
Harley-Davidson emphasize in choosing a supplier?
Internet Exercises
1. Many firms, large and small, have outsourced key functions, like payroll
processing to ADP. Go to adp.com and (1) identify the range of services
that ADP offers; (2) describe the types of customers the firm serves.
2. BASF “doesn’t make the products you buy, but makes them better.” Go
to http:// www.basf.com and (1) outline the markets that BASF serves
and (2) the products it sells.
CASE
R.I.M.’s BlackBerry and Apple’s iPhone: The Face-Off
in the Business Market43
Research in Motion Ltd. (R.I.M.), the maker of the BlackBerry, is the North American leader in building smartphones, the versatile handsets that operate more like
computers than phones. Once the exclusive domain of e-mail–obsessed professionals
and managers across the business market, smartphones are now prized by consumers who want easy access to the Web and digital music and video even more than a
mobile connection to their e-mail inbox. The iPhone introduction shifted the contours of the smartphone market toward consumers. An industry once dominated by
technical discussions about enterprise security is now dominated by buzz around
video games, sleek handset design, and mobile social networks. “That means that
R.I.M., which has historically viewed big corporations and wireless carriers as its
bedrock customers, needs to alter its DNA in a hurry” in order to retain its leadership position. In the first quarter of 2008, R.I.M. held 45 percent of the U.S. market
for smartphones, compared with a nearly 20 percent share for Apple.44 The breakdown in sales indicates that BlackBerry dominates the corporate market and Apple’s
iPhone is strong in the consumer market.
New Strategy Directions
To capitalize on its strong brand and leadership position in the smartphone industry,
R.I.M. introduced two phones aimed exclusively at the consumer market: the BlackBerry Pearl and the Curve. Well received by consumers, the products met R.I.M.’s
performance expectations and now account for a majority of R.I.M.’s device sales.
In response, Apple now includes a software upgrade to allow iPhones to connect directly to corporate e-mail systems—a dagger aimed at the heart of R.I.M.’s strength
in the business market. The upgrade also allows iPhone users to run customized
applications to track inventory, record expenses, and perform other corporate tasks.
So, R.I.M. is trying to capture some of the consumer market with the BlackBerry
and Apple is attacking R.I.M. on its home turf by driving demand for the iPhone
among corporate customers.
Some experts suggest that R.I.M. offers several capabilities that Apple can’t yet
match, including enhanced security and reliability for corporate users. For example,
the company runs its own wireless network so it can make sure e-mails are delivered
in a timely fashion.45 Yet, Apple demonstrates deep skills in product design, innovation, and branding. Simply stated, R.I.M.’s greatest challenge in the consumerdriven smartphone industry may come down to creating devices that people admire
and embrace as much as the iPhone.
43 Unless otherwise noted, this discussion is based on Brad Stone, “BlackBerry’s Quest: Fend Off the iPhone,” The New
York Times, April 27, 2008, pp. B1 and B4.
44 Jim Jubak, “New iPhone Shows Apple Still Gets It,” accessed at http://www.moneycentral.msn.com on June 6, 2008.
45 Arik Hesseldahl, “The iPhone Eyes BlackBerry’s Turf,” Business Week, June 23, 2008, p. 38.
31
32
Part I
The Environment of Business Marketing
Discussion Questions
1. Suggest possible strategies that Apple might follow to strengthen the position of
the iPhone in the business market. In turn, what strategies could R.I.M. follow to
strengthen the performance of the BlackBerry brand in the consumer market?
2. In your view, which brand will win the battle in the business market? In the
consumer market?
CHAPTER
2
The Business Market: Perspectives
on the Organizational Buyer
The business marketer must understand the needs of a diverse mix of organizational
buyers drawn from three broad sectors of the business market—commercial enterprises, government (all levels), and institutions—as well as from an expanding array
of international buyers. After reading this chapter, you will understand:
1. the nature and central characteristics of each of these market sectors.
2. how the purchasing function is organized in each of these components of
the business market.
3. the dramatic role that online purchasing assumes in the business market.
4. the need to design a unique marketing program for each sector of the
business market.
33
34
Part I
The Environment of Business Marketing
Cisco Systems, Inc., provides the networking solutions that are the foundation of
the Internet and of most corporate, education, and government networks on a global
scale. Today, the Internet and computer networking are a fundamental part of business, education, personal communications, and entertainment. Virtually all messages
or transactions passing over the Internet are carried efficiently and securely through
Cisco equipment. Cisco provides the hardware and software solutions for transporting data, voice, and video within buildings, across campuses, or around the world.
Rather than serving individuals or household consumers, Cisco is a leading-edge
business-to-business firm that markets its products and services to organizations:
commercial enterprises (for example, corporations and telecommunications firms),
governmental units, and institutions (for example, universities and health-care organizations). Marketing managers at Cisco give special attention to transforming
complex technology products and services into concrete solutions to meet customer
requirements. For example, when Pep Boys, the leading automotive aftermarket and
service chain in the United States wanted to connect its 593 retail store locations
across 36 states, Cisco provided the network solution.1 Likewise, when Procter &
Gamble (P&G) wanted to launch a major Internet initiative to meet its aggressive
growth targets, the firm turned to Cisco.2 The sales team from Cisco described how
an efficient Internet strategy could improve the way companies interact with employees, suppliers, and customers. Working with Cisco, P&G implemented several initiatives, including an online system called “Web Order Management” that enables retail
customers, like Target, to connect to P&G any time to place and manage orders on
the Web. In working with Cisco, P&G Chief Information Officer (CIO) Steve David
commented: “We like to hook our wagon to people who are the best so they can help
us be the best at creating that all-important competitive advantage.”3
Each of the three business market sectors—commercial firms, institutions, and
governments—has identifiable and unique characteristics that business marketers
must understand if marketers wish to grow their client bases. A significant first step in
creating successful marketing strategy is to isolate the unique dimensions of each major business market sector. How much market potential does each sector represent?
Who makes the purchasing decisions? The answers provide a foundation on which
managers can formulate marketing programs that respond to the specific needs and
characteristics of each business market sector.
Commercial Enterprises: Unique
Characteristics
Commercial enterprises include manufacturers, construction companies, service firms
(for example, hotels), transportation companies, selected professional groups (for example, dentists), and resellers (wholesalers and retailers purchasing equipment and supplies
to use in their operations). Manufacturers are the most important commercial customers:
The 100 largest ones purchase more than $1 trillion of goods and services annually.4
1 Customer Success Story: “Cisco Helps Pep Boys Improve Point-of-Sale Applications, Security Posture, and Future
Flexibility,” http://www.cisco.com, accessed June 6, 2008, pp. 1–4.
2 “Cisco Customer Profile: Procter & Gamble,” http://www.cisco.com, accessed July 23, 2002, pp. 1–3.
3 Ibid., p. 3.
4 Anne Millen Porter, “Containing Total Spend,” Purchasing 132 (November 6, 2008): pp. 18–25.
Chapter 2
The Business Market: Perspectives on the Organizational Buyer
35
Distribution by Size
A startling fact about the study of manufacturers is that so few of them remain. Available evidence suggests that there are approximately 350,000 manufacturing firms
in the United States.5 And although only 30,000 manufacturing firms (fewer than
10 percent) employ more than 100 workers each, this handful of firms ships more
than 75 percent of all U.S. manufactured products. Because manufacturing operations are so concentrated in the United States, the business marketer normally
serves far fewer but far larger customers than does a consumer-product marketer.
For example, Intel sells microprocessors to a few large manufacturers, like Dell and
Hewlett-Packard, who, in turn, target millions of potential computer buyers. Clearly,
large buyers are generally vitally important to business marketers. Because each large
firm has such vast buying power, business marketers often tailor particular marketing
strategies for each customer.
Smaller manufacturing firms also constitute an important business market segment. In fact, more than two-thirds of all U.S. manufacturers employ fewer than
20 people.6 In addition to small manufacturers, more than 5 million small businesses
in the United States employ fewer than 6 people each. Based on sheer numbers, small
businesses represent a dominant category of business market customers—but a market that is often difficult to serve.7 Because the organizational buyer in smaller firms
has different needs—and often a very different orientation—astute marketers adjust
their marketing programs to this market segment’s particular needs. To illustrate,
FedEx wanted to increase its share of the small shipper market but recognized that
picking up packages at many small businesses is more expensive than picking them up
at one larger location.8 To cost-effectively reach these customers, FedEx encourages
small shippers to bring their packages to conveniently located FedEx drop-off points.
The strategy has been successful.
Geographical Concentration
Size is not the only concentration factor important to the business marketer: Manufacturers are also concentrated geographically. More than half of all U.S. manufacturers are located in only eight states: California, New York, Ohio, Illinois, Michigan,
Texas, Pennsylvania, and New Jersey. Most large metropolitan areas are lucrative
business markets. Geographical concentration of industry, however, means only that
a large potential volume exists in a given area; each buyer’s requirements may still
vary significantly.
Geographic concentration has important implications for formulating marketing
strategy. First, firms can concentrate their marketing efforts in high-market-potential
areas, making effective use of full-time personal sales forces in these markets. Second,
distribution centers in large-volume areas can ensure rapid delivery to a large proportion of customers. Finally, firms may not be able to tie their salespeople to specific
5 U.S. Department of Commerce, Bureau of the Census, 2005 County Business Patterns, accessed at www.censtats.gov,
June 6, 2008.
6 Ibid.
7 Arun Sharma, R. Krishnan, and Dhruv Grewal, “Value Creation in Business Markets,” Industrial Marketing Management
30 (June 2001): pp. 391–402.
8 Thomas H. Davenport, Jeanne G. Harris, and Ajay K. Kohli, “How Do They Know Their Customers So Well?” MIT
Sloan Management Review 42 (Winter 2001): p. 65.
36
Part I
The Environment of Business Marketing
geographic areas because many large buying organizations entrust the responsibility
for purchasing certain products and materials for the entire company to a single individual. For example, Wendy’s International, Inc., operates a centralized purchasing system from its Dublin, Ohio, headquarters that supports the entire Wendy’s
network—all corporate and franchise restaurants on a global basis. The centralized
staff purchases all direct materials for all of the restaurants—food, packaging, and supplies. Judith Hollis, vice president of supply chain management at Wendy’s, notes:
We view our job as developing supplier partnerships that are going to assist
Wendy’s with maintaining our competitive advantage. We look to . . . companies that are involved in technological innovation in quality, food, safety, and
preparation efficiency.9
By understanding how a potential buyer’s purchasing organization is structured, business marketers are better equipped to identify buying influentials and to develop responsive strategy.
Classifying Commercial Enterprises
Marketers can gain valuable strategy insights by identifying the needs and requirements of different types of commercial enterprises or business customers. The North
American Industrial Classification System (NAICS) organizes business activity
into meaningful economic sectors and identifies groups of business firms that use
similar production processes.10 The NAICS is an outgrowth of the North American
Free Trade Agreement (NAFTA); it provides for standard economic data reporting
among Canada, Mexico, and the United States. Every plant or business establishment
receives a code that reflects the primary product produced at that location. The new
system, which includes traditional industries while incorporating new and emergingtechnology industries, replaces the Standard Industrial Classification (SIC) system
that was used for decades.
Figure 2.1 illustrates the building blocks of the system. Observe that the first
two digits identify the economic sector and that as more digits are added, the
classification becomes finer. For example, all business establishments that create,
disseminate, or provide the means to distribute information are included in the Information sector: NAICS Code 51. Nineteen other economic sectors are included
in the system. More specifically, U.S. establishments that produce paging equipment are assigned an NAICS Code of 513321. Individual countries customize the
six-digit codes for industry subdivisions, but at the five-digit level they are standardized across the three countries.
Using the NAICS If marketing managers understand the needs and requirements
of a few firms within a classification category, they can project requirements for other
firms that share that category. Each group should be relatively homogeneous in terms
of raw materials required, component parts used, and manufacturing processes employed. The NAICS provides a valuable tool for identifying new customers and for
targeting profitable segments of business buyers.
9 Michael Fredette, “An Interview with Judith Hollis,” Journal of Supply Chain Management 37 (Summer 2001): p. 3.
10 www.naics.com, “History of SIC/NAICS,” accessed June 15, 2005.
Chapter 2
FIGURE 2.1
Economic
Sector
2-digit
NAICS 51
Information
The Business Market: Perspectives on the Organizational Buyer
37
NORTH AMERICAN INDUSTRIAL CLASSIFICATION SYSTEM
Economic
Subsector
3-digit
NAICS 513
Broadcasting and
Telecommunications
Industry
Group
4-digit
NAICS 5133
Telecommunications
Industry
Group
5-digit
NAICS 51332
Wireless
Telecommunications
Carriers
U.S.
Industry
6-digit
NAICS 513321
Paging
SOURCE: Reprinted from K. Douglas Hoffman et al., Marketing: Best Practices (Mason, Ohio: South-Western/Thomson Learning,
2003), p. 171.
The Purchasing Organization
Regardless of its organizational characteristics, every firm must procure the materials, supplies, equipment, and services it needs to operate the business successfully.
“Spending on purchased goods and services can represent 70 percent of a company’s
costs, so business leaders have long known that purchasing improvements can directly
improve the bottom line.”11 How goods and services are purchased depends on such
factors as the nature of the business, the size of the firm, and the volume, variety,
and technical complexity of items purchased. Rarely do individual departments in a
corporation do their own buying. An individual whose title is director of purchasing or director of procurement usually administers procurement for all departments.
Indeed, a decade marked by fierce global competition and rising energy and commodity costs opened the eyes of executives everywhere to the strategic benefits that can
be achieved through a best-in-class purchasing and supply management function. So
the stature and visibility of corporate buyers has risen in the organization. Alcoa Inc.,
IBM, and Sarah Lee Corporation, along with a growing list of others, have created
chief purchasing officer (CPO) positions, often reporting directly to the chief executive or chief operating officer.12
The day-to-day purchasing function is carried out by buyers, each of whom is
responsible for a specific group of products. Organizing the purchasing function in
this way permits buyers to acquire a high level of technical expertise about a limited
number of items. As products and materials become more sophisticated, buyers must
11 Chip W. Hardt, Nicholas Reinecke, and Peter Spiller, “Inventing the 21st Century Purchasing Organization,”
The McKinsey Quarterly, 2007 (4): p. 116.
12 Timothy Aeppel, “Global Scramble for Goods Gives Corporate Buyers a Lift,” The Wall Street Journal, October 2, 2007,
p. A1; and Shelby D. Hunt and Donna Davis, “Grounding Supply Chain Management in Resource-Advantage Theory,”
Journal of Supply Chain Management 44 (January 2008): pp. 10–21.
38
Part I
The Environment of Business Marketing
TABLE 2.1
THE GOALS OF PURCHASING
Goals
Description
Uninterrupted Flow of Materials
Provide an uninterrupted flow of the materials,
supplies, and services required to operate the
organization.
Minimize the investment in inventory.
Maintain and improve quality by carefully
evaluating and choosing products and services.
Find competent suppliers and forge
collaborative relationships with supply chain.
Purchase required products and services at
lowest total cost.
Accomplish the purchasing objectives at the
lowest possible level of administrative costs.
Improve the firm’s competitive position by
reducing supply chain costs or capitalizing on
the capabilities of suppliers.
Manage Inventory
Improve Quality
Developing and Managing Supplier
Relationships
Achieve Lowest Total Cost
Reduce Administrative Costs
Advance Firm’s Competitive Position
SOURCE: Adapted with modifications from Michael R. Leenders, Harold E. Fearon, Anna E. Flynn, and P. Fraser
Johnson, Purchasing and Supply Management, 12th ed. (Chicago: Irwin, 2002), pp. 40–43, and Andrew Bartolini,
“CPO Rising: The CPO’s Agenda for 2008,” Aberdeen Group, February 2008, accessed at http://www.aberdeen
.com on June 7, 2008.
become more knowledgeable about material characteristics, manufacturing processes,
and design specifications. Frequently, a sizable group is employed to conduct research,
evaluate materials, and perform cost studies.
Goals of the Purchasing Function
To address the needs of business customers of all types, the marketer has to understand the purchasing manager’s goals and how the purchasing function contributes to
the organization’s objectives (Table 2.1). The purchasing decision maker must juggle
a number of different objectives that often clash. For example, the lowest-priced component part is unacceptable if it does not meet quality standards or is delivered two
weeks late. In addition to protecting the cost structure of the firm, improving quality,
and keeping inventory investment to a minimum, purchasing assumes a central role
in managing relationships with suppliers. Here purchasing assumes a central role in
supply chain management.
Supply chain management is a technique for linking a manufacturer’s operations with those of all of its strategic suppliers, key intermediaries, and customers.
The approach seeks to integrate the relationships and operations of both immediate, first-tier suppliers and those several tiers back in the supply chain, in order to
help second-, third-, and fourth-tier suppliers meet requirements like quality, delivery, and the timely exchange of information. Firms that embrace supply chain
management also solicit ideas from key suppliers and involve them directly in the
new-product-development process. By managing supply chain costs and linking supplier capabilities to new product development, the purchasing function is advancing
corporate performance in many organizations.
Chapter 2
The Business Market: Perspectives on the Organizational Buyer
39
INSIDE BUSINESS MARKETING
The Supply Chain for McNuggets
Purchasing managers at McDonald’s Corporation
have worked closely with suppliers to develop a
sophisticated model to reduce the cost of chicken.
The model isolates how various feed mixes affect
weight gain in chickens, and suppliers are able
to optimize chicken weight gain in response to
changing food prices.
McDonald’s also closely manages and tightly
coordinates its supply chain from hatchery to processor
and into the restaurants. “McDonald’s explicitly
orders hatcheries to place eggs in anticipation of
the sales forecast for chicken products. Product
movement through the supply base is so well
orchestrated that a supplier can confidently place
the eggs in the hatcheries seventy-five days
before McDonald’s expects to sell the chicken as
McNuggets.”
SOURCE: Timothy M. Laseter, Balanced Sourcing: Cooperation
and Competition in Supplier Relationships (San Francisco:
Jossey-Bass, 1998), p. 14.
Strategic Procurement13
Leading-edge organizations like Dell Computer, GE, and Honda demonstrate the
critical role that purchasing can assume in creating profit opportunities in their industries. To illustrate, Honda, long recognized for purchasing excellence and its ability
to sustain customer loyalty, was able to reduce by 20 percent the costs of external
purchases that are embodied in the current Accord. A senior purchasing executive at
Honda described how it was done:
The first thing we did was compile a big list of every possible way we could
remove costs from the Accord; most of them, in fact, came from suppliers’
work with purchasing and engineering. We studied each idea, prioritized
them according to their likelihood of success, and then just started focusing
our work on developing them.14
Understanding the Total Cost To unlock savings and growth opportunities, the
purchasing function must develop a keen understanding of the total cost and value of
a good or service to the firm. Such an approach requires purchasing managers to consider not only the purchase price but also an array of other considerations:
• the factors that drive the cost of the product or service in the supply chain, such
as transportation;
• the costs of acquiring and managing products or services;
• quality, reliability, and other attributes of a product or service over its complete
life cycle;
• the value of a product or service to a firm and its customers.
13 This section is based on Matthew G. Anderson and Paul B. Katz, “Strategic Sourcing,” International Journal of Logistics
Management 9 (1, 1998): pp. 1–13.
14 Timothy M. Laseter, Balanced Sourcing: Cooperation and Competition in Supplier Relationships (San Francisco: Jossey-Bass,
1998), p. 224.
40
Part I
The Environment of Business Marketing
Fundamental to this total-system cost perspective is the concept of total cost of
ownership. “Total cost of ownership considers both supplier and buyer activities,
and costs over a product’s or service’s complete life cycle.”15 For example, a firm can
justify buying a higher-quality product and paying a premium price because the initial
purchase cost will be offset by fewer manufacturing defects, lower inventory requirements, and lower administrative costs. The total cost of ownership means understanding a range of cost-value relationships associated with individual purchases.
Levels of Procurement Development In capturing cost savings through improved
procurement, Matthew Anderson and Paul Katz of Mercer Management Consulting
suggest that firms operate at different levels of development and emphasize different
pathways to cost reduction and revenue enhancement (Figure 2.2). Ranging from the
least to the most developed, these approaches include (1) Buy for Less; (2) Buy Better;
(3) Consume Better; and (4) Sell Better. Note that the most developed strategy—Sell
Better—ties purchasing activities directly to strategy. Here procurement builds supplier relationships that ultimately enhance the growth and the market strength of the
organization.
Level 1—Leveraged Buy (Buy for Less) Many firms demonstrate Level 1 procurement
practices and achieve cost savings by centralizing decision-making authority, which
permits the consolidation of volume and by selecting suppliers that provide the best
prices and terms.
Level 2—Linked Buy (Buy Better) The next level of procurement development is triggered when the procurement organization takes an external view of the supply chain
and develops mutually beneficial relationships with suppliers. It achieves cost savings
by streamlining the bidding process, optimizing delivery and information flows, and
making stable commitments to enable efficient production by suppliers. Incremental
cost savings of 5 to 25 percent result from moving from Level 1 to Level 2.
Level 3—Value Buy (Consume Better) The goal of Level 3 is to advance the performance of the procurement function by optimizing the life cycle costs and value of
products and services. Value analysis, complexity management, and early supplier involvement in product design allow buyers and suppliers to uncover added value.
• Value analysis is a method of weighing the comparative value of materials,
components, and manufacturing processes from the standpoint of their purpose,
relative merit, and cost in order to uncover ways of improving products, lowering costs, or both. For example, Ferro Corporation developed a new coating
process that allows Whirlpool to paint a refrigerator cabinet in 10 minutes compared with the old process, which took 3 hours.16 The new process provided
significant cost savings for Whirlpool.
• Complexity management seeks cost reductions by simplifying the design
of products or by using standardized component parts in products and across
product lines. Complexity management can also involve the outsourcing of
15 Anderson and Katz, “Strategic Sourcing,” p. 3. See also, James Carbone, “Using TCO to Rate Suppliers,” Purchasing
133 (February 19, 2004): pp. 30–34.
16 Elizabeth Baatz, “How Purchasing Handles Intense Cost Pressure,” Purchasing 127 (October 8, 1999): pp. 61–66.
FIGURE 2.2
LEVELS OF PROCUREMENT DEVELOPMENT AND PATHWAYS TO SAVINGS/REVENUE ENHANCEMENT
Levels of Procurement Development and Pathways to Savings/Revenue Enhancement
Levels of Procurement Development
3. Value Buy:
Value
Management/Optimization
4. Integrated Sell:
Commercial Synergy
Leverage Points:
• Utilize supplier fixed costs
more fully
• Exploit competitive
supply base structure
• Leverage buyer‘s share
• Enhanced negotiation and
contracting skills
• Broader consideration of terms
and conditions
Leverage Points:
• Improved coordination/forecast
accuracy and predictability
• Optimized logistical flows/value
added roles
• Streamlined transactional
information flow
• Elimination of redundant/
non–value-added activities
• Improved supplier cost productivity
• Commitments to enable supplier
investments
Leverage Points:
• Increased and early supplier
involvement in solution design
• Reduced complexity/simplified
specifications
• Increased standardization
• Clarified response time objectives
• Rationalized requirements
• Controlled consumption rates
• Performance incentives to achieve
total cost productivity
Leverage Points:
• Integrate multi-company
products/services and channel
portfolio
• Introduce creative risk sharing
• Exploit supplier capabilites and
potential
• Manage complex channel
relationships
• Cross-utilize infrastructure and
operating resources among
multiple parties in the value chain
IMPACT
Buy for Less
Buy Better
Consume Better
Sell Better
Pathways to Cost Savings and Revenue Enhancement
SOURCE: Reprinted with permission from Matthew G. Anderson and Paul B. Katz, “Strategic Sourcing,” International Journal of Logistics Management 9 (1, 1998): p. 4, Figure 3. Website at
http://www.ijlm.org.
The Business Market: Perspectives on the Organizational Buyer
2. Linked Buy:
Supplier-Buyer
Integration/Linked Cost
Minimization
Chapter 2
1. Leveraged Buy:
Volume
Consolidation/Supply
Base Optimization
41
42
Part I
FIGURE 2.3
The Environment of Business Marketing
SEGMENTING THE BUY
Segmenting the Buy
Revenue
Impact/
Business
Risk
How much impact
could the purchase
have on corporate
revenues over time?
• Advertising
• Telemarketing
• Branded finished goods
• Critical components
• High-technology
products and services
• Outsourced
manufacturing functions
• Office supplies
• Travel
• Materials
• Logistics
• Benefits programs
• Professional services
Procurement Complexity
Highest
Customer
Value
Impact
How complex are the cost
drivers of the purchase?
• Technology/design
• Supply chain integration
• Lifecycle management
SOURCE: Reprinted with permission from Matthew G. Anderson and Paul B. Katz, “Strategic Sourcing,” International Journal of Logistics
Management 9 (1, 1998): p. 7, Figure 8. Website at http://www.ijlm.org.
production or assembly tasks to supply chain partners. For example, Boeing
is taking the concept of supplier collaboration to new heights in the development of the 787 Dreamliner. Rather than integrating supplier parts and materials in its own features, key suppliers assume that responsibility and provide
complete subsystems to Boeing. To illustrate, Rockwell Collins provides the
major avionics systems—displays, communications, and more—to Boeing for
the 787.17
• To capture fresh ideas, technologies, and cost savings, leading purchasing organizations emphasize early supplier involvement in new product development. At firms like Boeing, Harley-Davidson, Apple, and Honda, key suppliers
actively contribute to the new-product-development process from the design
stage to the product’s introduction, often spending months on-site collaborating with the development team.
By using these methods, Level 3 savings opportunities can be substantial. Research
by McKinsey & Company indicates that high-performing purchasing groups generate
annual cost savings that are nearly six times greater than those of low performers.18
Level 4—Integrated Sell (Sell Better) Level 4 development applies when specific
product and service choices the purchasing organization makes have a significant
effect on revenue and also involve a high degree of business risk. For example, the
investments of a telecommunications firm such as AT&T in technology products
that form its infrastructure have a major effect on the future of the firm. Under such
17 Susan Avery, “Boeing Executive Steven Schaffer is Named Supply Chain Manager of the Year for the 787 Dreamliner
Project,” October 18, 2007 Issue of Purchasing, accessed at http://www.purchasing.com on June 5, 2008.
18 Hardt, Reinecke, and Spiller, “Inventing the 21st Century Purchasing Organization,” p. 116.
Chapter 2
The Business Market: Perspectives on the Organizational Buyer
43
INSIDE BUSINESS MARKETING
Respond with Value-Based Selling Tools
Astute B2B marketing strategists use value-based
selling to vividly demonstrate the superior value
that they provide compared to rivals. For example,
Microsoft provides an online tool that potential
business customers can use to cost, configure,
and compare the Microsoft Windows Server to
the whole universe of options, such as Linux. In
5 minutes or less, a business customer can estimate
the total cost of ownership of the Microsoft option
and then undertake a more detailed business-value
study that provides a comprehensive analysis of
costs and benefits—tailored to their organization.
To illustrate, when the Linux-based highperformance computing cluster at Callaway
Golf reached the end of its useful life, key
decision makers decided to examine two options:
(1) another Linux-based system or (2) a solution
based on Windows Compute Cluster Server running
on Hewlett-Packard hardware. Callaway Golf
chose the high-performance computing solution
based on the Windows server because it offered
significant advantages, including manageability,
ease of use, and cost. John Loo, design systems
senior manager at Callaway Golf, observed: “What
really surprised us was the difference in software
licensing and maintenance costs. A Linux solution
would have been more expensive because we would
have needed a separate job scheduler, which is
something that Windows Compute Cluster Server
provides.” Microsoft used value-based selling to
demonstrate the points of difference.
SOURCE: “Microsoft Customer Case Study: Callaway Golf,” April
11, 2008, accessed at http://www.microsoft.com on June 12, 2008.
conditions, choosing the right technologies and sharing the risks with important
suppliers are crucial to the success of AT&T’s corporate strategy. Highly skilled
and knowledgeable purchasing professionals are required to achieve this advanced
level of procurement development, which unites purchasing decisions with corporate
growth strategies.
Segmenting Purchase Categories Each firm purchases a unique portfolio of
products and services. Leaders in procurement are giving increased attention to segmenting total purchases into distinct categories and sharpening their focus on those
purchases that have the greatest effect on revenue generation or present the greatest
risk to corporate performance. From Figure 2.3, observe that various categories of
purchases are segmented on the basis of procurement complexity and the nature of
the effect on corporate performance (that is, revenue impact/business risk).
Which Purchases Affect Performance? Procurement complexity considers factors such as the technical complexity, the scope of supply chain coordination required,
and the degree to which life cycle costs are relevant. The revenue impact/business risk
dimension considers the degree to which a purchase category can influence customers’
perceptions of value. For example, purchasing managers at Ford decided that some
components are important to brand identity, such as steering wheels, road wheels,
and other highly visual parts.
Purchasing managers can use a segmentation approach to isolate those purchase
categories that have the greatest effect on corporate revenues. For example, advertising services could have tremendous risk implications relative to customer perceptions
of value, whereas office supplies remain a cost issue. Or, in the high-tech arena, the
44
Part I
The Environment of Business Marketing
procurement of a new generation of semiconductor technology may essentially be a
bet on the company’s future.19
Business marketers should assess where their offerings are positioned in the portfolio of purchases a particular organization makes. This varies by firm and by industry. The revenue and profit potential for the business marketer is greatest in those
purchasing organizations that view the purchase as strategic—high revenue impact
and high customer-value impact. For example, in the auto industry, electronic braking
systems, audio and navigation systems, as well as turbochargers, fit into this category
and represent about one-quarter of a passenger vehicle’s cost.20 Here the marketer
can contribute offerings directly tied to the customer organization’s strategy, enjoying an attractive profit margin. If the business marketer can become a central component of the customer’s supply chain, the effect is even more significant: a valuable,
long-term relationship in which the customer views the supplier as an extension of
its organization. For categories of goods that purchasing organizations view as less
strategic (for example, office supplies), the appropriate marketing strategy centers on
providing a complete product assortment, competitive pricing, timely service support,
and simplified ordering. By understanding how customers segment their purchases,
business marketers are better equipped to target profitable customer groups and develop customized strategies.
E-Procurement 21
Like consumers who are shopping at Amazon (http://www.amazon.com), purchasing
managers use the Internet to find new suppliers, communicate with current suppliers, or place an order. While providing a rich base of information, purchasing over
the Internet is also very efficient: It is estimated that purchase orders processed over
the Internet cost only $5, compared with the current average purchase order cost of
$100. For example, IBM has moved all of its purchasing to the Web and has created
a “private exchange” that links its suppliers. A private exchange allows a company
like IBM to automate its purchases and collaborate in real time with a specially invited
group of suppliers.22 By handling nearly all its invoices electronically (some 400,000
e-invoices a month), IBM saves nearly $400 million per year using its more efficient
Web purchasing strategy.
Everyone Is Getting Wired
Less than a decade ago, pioneering enterprises like IBM, GE, and United Technologies began testing Internet-based negotiations as part of their strategic purchasing
programs. Today, more than 80 percent of Fortune 1000 enterprises have adopted
e-procurement software, and new low-cost, hosted options are driving the adoption of e-procurement solutions among medium-sized enterprises. Leading suppliers of
19 Anderson and Katz, “Strategic Sourcing,” p. 7.
20 Srikant Inampudi, Aurobind Satpathy, and Anant Singh, “Can North American Auto Suppliers Create Value?” The
McKinsey Quarterly, June 2008, accessed at http://www.mckinsey.com on June 8, 2008.
21 Tim A. Minahan, “Best Practices in E-Sourcing: Optimizing and Sustaining Supply Savings,” September 2004, research
report by Aberdeen Group, Inc., Boston, Massachusetts; accessed at http://www.ariba.com on June 15, 2005.
22 Nicole Harris, “‘Private Exchanges’ May Allow B-to-B Commerce to Thrive After All,” The Wall Street Journal,
March 16, 2001, p. B4.
Chapter 2
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45
e-procurement software include Ariba, Inc. (http://www.ariba.com), Emptoris (http://
www.emptoris.com), and Oracle Corporation (http://www.oracle.com). To compete
effectively in this information-rich environment, business marketing managers must
develop a firm understanding of the e-procurement tools that customers are embracing.
Enhancing the Buyer’s Capabilities
Rather than a strategy, e-procurement is a technology platform that enables information to be exchanged efficiently and processes to be automated. E-procurement is
“the use of Web-based applications, decision support tools, and associated services to
streamline and enhance strategic sourcing processes and knowledge management.”23
Included among the distinguishing components of e-procurement solutions are the
following capabilities:
• online negotiations that enable the buyer to query suppliers with a request-forproposal (RFP), request-for-quote (RFQ), or request-for-information (RFI),
and to conduct reverse auctions (discussed below);
• collaboration tools that enable the purchasing manager to (1) collaborate with internal stakeholders (for example, departments) to develop detailed specifications
and priorities for goods or services to be purchased and (2) provide a detailed
description of requirements to suppliers through an RFP;
• knowledge management capabilities that provide the procurement function and
senior management with a central repository of valuable data and information
on supplier performance, material and component costs, process flows, and best
practices;
• analytical tools that support detailed analysis and modeling of purchasing costs
and total spending by category across the enterprise.
Delivering Measurable Results
Why are purchasing organizations embracing online purchasing technologies?
Because they “deliver measurable benefits in the form of material cost savings, process
efficiencies, and performance enhancements” according to Tim Minahan, a supply
chain consultant at the Aberdeen Group.24 Studying procurement processes at sixty
companies, including American Express, Motorola, and Alcoa, Aberdeen found that
e-procurement cut purchasing cycle time in half, reduced material costs by 14 percent
and purchasing administrative costs by 60 percent, and enhanced the ability of procurement units to identify new suppliers on a global scale.
Buying Direct and Indirect Goods
In the United States alone, organizations spend more than $1.4 trillion annually on
indirect goods or operating resources—items that organizations of all types need to
run day-to-day operations. Examples encompass everything from personal computers
23 Minahan, “Best Practices in E-Sourcing,” p. 3.
24 Ibid., p. 3.
46
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The Environment of Business Marketing
and spare parts for factory equipment to office furniture and employee travel, including airline tickets, hotel rooms, and car rental services.25 Powered by software from
Ariba, Motorola has used its global e-requisitioning system to reduce procurement
costs and control indirect purchasing, yielding more than $300 million of cost savings in a recent year.26 During the Internet-boom years, companies invested heavily
in e-procurement systems but used them primarily to buy indirect goods. As adopters
reaped huge cost savings and began to trust Internet-based purchasing systems, many
firms began to use e-procurement to buy direct materials or entering goods—the raw
materials or component parts that are core to a firm’s manufacturing process. As
e-procurement systems become more affordable, some experts predict that small
and medium-sized firms will soon adopt the purchasing practices of the industry
leaders. To illustrate, many suppliers apply what they learn from best-practice
firms, like Toyota, to their own purchasing processes and relationship management
programs.
Reverse Auctions
One online procurement tool that sparks debate in the business market is the reverse
auction. Rather than one seller and many buyers, a reverse auction involves one
buyer who invites bids from several prequalified suppliers who face off in a dynamic,
real-time, competitive bidding process. Reverse auctions are most widely used in
the automobile, electronics, aerospace, and pharmaceutical industries. Proponents
claim that reverse auctions can lower the cost of procuring products and services by
20 percent or more. A case in point: Sun MicroSystems saved 30 percent on the commodities it purchased through reverse auctions.27 Critics counter that reverse auctions can inflict real damage on supplier relationships and that the realized savings are
often overstated.28 For example, during the recent economic downturn, many firms
used reverse auctions as a tactical weapon to drive supplier prices down but often
found that the winning bidder delivered less value—lower quality and poorer service
than existing suppliers.
Reverse auctions are best suited for commodity-type items like purchasing materials, diesel fuel, metal parts, chemicals, and many raw materials. On the other hand,
reverse auctions are generally not appropriate for strategic relationships, where suppliers have specialized capabilities and few suppliers can meet quality and performance
standards. Rob Harlan, senior director of e-procurement for Motorola, aptly states:
“We pride ourselves on strong supplier relationships. We are not going to jeopardize
these for short-term gains with online auctions. You need to ensure the integrity of
the bidding environment, educate suppliers on how best to compete, and clearly communicate your intentions and requirements.”29
25 Mark Vigoroso, “Buyers Prepare for Brave New World of e-Commerce,” Purchasing 127 (April 22, 1999): pp. S4–S12;
and Mylene Mangalindan, “As Times Get Tough, Firms Buy Online,” The Wall Street Journal, June 3, 2008, p. B10.
26 James Carbone, “Motorola Leverages Its Way to Lower Cost,” Purchasing 133 (September 16, 2004): pp. 31–38.
27 James Carbone, “Sun’s e-Auction Evolution,” September 13, 2007 issue of Purchasing, accessed at http://www
.purchasing.com on June 10, 2008.
28 Mohanbir Sawhney, “Forward Thinking About Reverse Auctions,” June 1, 2003 issue of CIO Magazine, accessed at
http://www.cio.com on June 20, 2005, pp. 1–6.
29 Minahan, “Best Practices in E-Sourcing,” p. 52.
Chapter 2
The Business Market: Perspectives on the Organizational Buyer
47
ETHICAL BUSINESS MARKETING
Gift Giving: “Buy Me These Boots and You’ll Get My Business”
Greg Davies, director of sales for Action Printing
in Fond du Lac, Wisconsin, encountered
this awkward situation. Leaving a restaurant
after taking a potential customer to lunch, the
prospective client stopped to examine the window
display of a country-and-western store located
nearby. That’s when Davies’s prospect turned to
him and said very slowly: “I have always wanted a
pair of boots like this.” “There was no mistaking
it: He expected me to buy him the boots,” recalls
Davies, who simply smiled and began walking
again. He declined because company policy, as
well as his personal value system, forbids the
exchange of expensive personal gifts for business.
As you would imagine, from that day forward,
Greg felt awkward around the prospect.
Sales experts suggest that Greg made the
right business decision, as well as the right moral
decision. He stood behind a well-conceived
company policy. In turn, Jacques Werth, a sales
consultant, agreed with the decision to walk away.
“If your relationship is based on extravagant gifts,
entertainment, and other perks, you’re likely to
lose the business when a bigger bribe comes along,
anyway.”
SOURCE: Melinda Ligos, “Gimme, Gimme, Gimme!” Sales &
Marketing Management (March 2002): pp. 33–40.
How Organizational Buyers Evaluate Potential Suppliers
E-procurement systems provide purchasing managers with a rich information environment and a sophisticated set of analytical tools they can use to evaluate the performance of suppliers. Many criteria may be factored into a buyer’s ultimate decision:
quality, price, delivery reliability, company image, and capability. Buyer perceptions
are critical. When products are perceived as highly standardized or commodity-like,
price assumes special importance in the purchasing decision and the business marketer faces the intense competitive pressure that reverse auctions impose. On the
other hand, when the value offerings of the business marketer are perceived as unique,
other criteria dominate and the opportunity exists to develop a strategic relationship
with the customer. At a fundamental level, customers in the business market are interested in the total capabilities of a supplier and how those capabilities can assist them
in advancing their competitive position—now and in the future.
To this point, the discussion has centered on one sector of the business market—
commercial enterprises—and the role the purchasing function assumes. Attention
now turns to the government market.
Governments: Unique Characteristics
Federal (1), state (50), and local (87,000) government units generate the greatest
volume of purchases of any customer category in the United States. Collectively,
these units spend more than $1.5 trillion on goods and services each year—the federal government accounts for $400 billion, and states and local government account
for the rest.30 Governmental units purchase from virtually every category of goods
30 U.S. Census Bureau, Statistical Abstract of the United States: 2008, accessed at http://www.census.gov on June 12, 2008.
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FIGURE 2.4
HEWLETT PACKARD’S E-GOVERNMENT STRATEGY
As customers have become adept at shopping online, managing their bank accounts, and requesting
services, Internet-savvy citizens now expect the same from their governments. Enabled by
information technology, public agencies are giving citizens new tools to access information and
services while, at the same time, introducing new efficiencies in government operations.
Hewlett Packard (H-P) has developed a complete portfolio of services tailored to
e-government goals:
• Improving quality and ease of access for citizens
• Reducing the cost of service delivery
• Simplifying the implementation of government directives
• Advancing economic growth by stimulating the development of a digital economy
H-P offers targeted solutions that allow citizens to:
• Test for and renew drivers’ licenses online
• Purchase decals and permits online
• Access information and services around the clock from public agencies and government
departments
H-P has also developed a suite of solutions that governments require for efficient and effective
Homeland Security. Included here are:
• Mission-focused technology solutions that protect borders and public transportation
systems
• Supportive technologies to enhance the capabilities of law enforcement agencies,
firefighters, and emergency response teams
• Security solutions to protect critical infrastructure assets and defend against catastrophic
threats.
H-P Success Story:
• Government Customer: Chicago Office of Emergency and Communications (OEMC)
• Mission: The Chicago OEMC is responsible for all 911 communications and emergency
operations and for responding to emergency incidents of all types in the city.
• Customer Solution: H-P technologies were applied to support an integrated emergency
operation center and are deployed in a Unified Communications Vehicle, which enables
city personnel to continue operations from any location. The OEMC also uses surveillance cameras to increase situational awareness when responding to 911 calls.
• Results: The Chicago city government can sustain operations in an alternate location in
the event that activities at any of its government buildings are disrupted.
SOURCES: “HP Services: A Comprehensive Managed Services Portfolio,” “Homeland Security,” and “Public Sector,
Health, and Education,” accessed at http://www.hp.com on December 4, 2008 and “Securing a City: Chicago Takes a
Unified Approach to Emergency Management,” accessed at http://www.hp.com on December 26, 2008.
Chapter 2
The Business Market: Perspectives on the Organizational Buyer
49
and services—office supplies, personal computers, furniture, food, health care, and military equipment. Business marketing firms, large and small, serve the government market.
In fact, 25 percent of the purchase contracts at the federal level are with small firms.31
E-Government
Across all levels of government, public officials are embracing the Internet as the best
means of delivering services to constituents. E-government, then, involves transferring traditional government operations to an integrated Internet environment to improve public-sector accessibility, efficiency, and customer service. For example, www.
govbenefits.com now provides users with access to information about 200 special
government benefit programs, and www.recreation.gov provides a description of all
publicly managed recreation sites in the United States. Many states, such as Texas,
Arizona, Michigan, and Illinois, are launching creative e-government initiatives to deliver service to citizens. For business marketing firms like IBM and Hewlett-Packard
that sell information technology products and services, e-government initiatives are
sparking a large market opportunity (see Figure 2.4).
Influences on Government Buying
Another level of complexity is added to the governmental purchasing process by the
array of influences on this process. In federal, state, and large-city procurement, buyers report to and are influenced by dozens of interested parties who specify, legislate,
evaluate, and use the goods and services. Clearly, the range of outside influences extends far beyond the originating agency.
Understanding Government Contracts
Government purchasing is also affected by goals and programs that have broad
social overtones, including compliance, set-asides, and minority subcontracting.
The compliance program requires government contractors to maintain affirmative
action programs for minorities, women, and the handicapped. Firms failing to do so
are barred from holding government contracts. In the set-aside program, a certain
percentage of a given government contract is “set aside” for small or minority businesses; no others can participate in that proportion of the contract. The minority
subcontracting program may require that major contractors subcontract a certain
percentage of the total contract to minority firms. For example, Ohio law requires
that 7 percent of all subcontractors on state construction projects be minorities. The
potential government contractor must understand these programs and how they apply
to the firm.
Most government procurement, at any level, is based on laws that establish contractual guidelines.32 The federal government has set forth certain general contract
provisions as part of the federal procurement regulations. These provisions include
stipulations regarding product inspection, payment methods, actions as a result of default, and disputes, among many others.
31 Stephanie N. Mehta, “Small Firms Are Getting More Government Contracts,” The Wall Street Journal, April 27,
1995, p. B2.
32 Michael R. Leenders and Harold E. Fearon, Purchasing and Supply Management, 11th ed. (Chicago: Irwin, 1997),
pp. 537–566.
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Without a clear comprehension of the procurement laws, the vendor is in an unfavorable position during the negotiation phase. The vendor particularly needs to explore the advantages and disadvantages of the two basic types of contracts:
1. Fixed-price contracts. A firm price is agreed to before the contract is awarded,
and full payment is made when the product or service is delivered as agreed.
2. Cost-reimbursement contracts. The vendor is reimbursed for allowable
costs incurred in performance of the contract and is sometimes allowed a
certain number of dollars above cost as profit.
Each type of contract has built-in incentives to control costs or to cover future
contingencies.
Generally, the fixed-price contract provides the greatest profit potential, but it
also poses greater risks if unforeseen expenses are incurred, if inflation increases dramatically, or if conditions change. However, if the seller can reduce costs significantly
during the contract, profits may exceed those estimated when the contract was negotiated. The government carefully administers cost-reimbursement contracts because
of the minimal incentives for contractor efficiency. Contracts of this type are usually
employed for government projects involving considerable developmental work for
which it is difficult to estimate efforts and expenses.
To overcome the inefficiencies of both the cost-reimbursement contract (which
often leads to cost overruns) and the fixed-price contract (which can discourage firms
from bidding because project costs are uncertain), the government often employs incentive contracts. The incentive contract rewards firms when their actual costs on a
project are below target costs, and it imposes a penalty when they exceed target costs.
Telling Vendors How to Sell: Useful Publications
Unlike most customers, governments often go to great lengths to explain to potential vendors exactly how to do business with them. For example, the federal government makes
available such publications as Doing Business with the General Services Administration, Selling
to the Military, and Selling to the U.S. Air Force. Government agencies also hold periodic
seminars to orient businesses to the buying procedures the agency uses. The objective is
to encourage firms to seek government business.
Purchasing Organizations and Procedures: Government
Government and commercial purchasing are organized similarly. However, governments tend to emphasize clerical functions because of the detailed procedures the law
requires. Although the federal government is the largest single industrial purchaser,
it does not operate like a single company but like a combination of several large companies with overlapping responsibilities and thousands of small independent units.33
The federal government has more than 15,000 purchasing authorities (departments,
agencies, and so on). Every government agency possesses some degree of buying influence or authority. Federal government procurement is divided into two categories:
defense and nondefense.
33 Ibid., pp. 552–559.
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51
Defense Procurement The Department of Defense (DOD) spends a large proportion of the federal government’s total procurement budget. The DOD’s procurement operation is said to be the largest business enterprise in the world. The era of
declining budgets for the DOD was quickly reversed with the terrorist attacks on the
United States in September 2001. Defense and homeland security became funding
priorities in the federal budget.
Each DOD military division—Army, Navy, and Air Force—is responsible for its
own major purchases. However, the Defense Logistics Agency (DLA) procures billions of dollars worth of supplies used in common by all branches. The DLA’s budget for procurement exceeds $35 billion annually.34 The purposes of the DLA are
to obtain favorable prices through volume purchasing and to reduce duplication of
purchasing within the military. Defense-related items may also be procured by other
government agencies, such as the General Services Administration (GSA). In fact, the
DOD is the GSA’s largest customer. Under current agreements between the GSA
and the DOD, the military purchases through the GSA many items such as vehicles,
desks, office machines, and hand tools.35 Also, many supplies for military-base operations are procured locally.
Nondefense Procurement Nondefense procurement is administered by a wide variety of agencies, including cabinet departments (for example, Health and Human
Services, Commerce), commissions (for example, the Federal Trade Commission),
the executive branch (for example, the Bureau of the Budget), federal agencies (for
example, the Federal Aviation Agency), and federal administrations (for example,
the GSA). The Department of Commerce centralizes the procurement of supplies
and equipment for its Washington office and all local offices. The Department of
the Interior, on the other hand, instructs each area and district office of the Mining Enforcement and Safety Administration to purchase mine-safety equipment and
clothing locally.
Like the DLA, the GSA centralizes the procurement of many general-use items
(for example, office furniture, pens, lightbulbs) for all civilian government agencies. The Federal Supply Service of the GSA is like the purchasing department
of a large diversified corporation because it provides a consolidated purchasing,
storing, and distribution network for the federal government. The Federal Supply Service purchases many items commonly used by other government agencies,
including office supplies, small tools, paint, paper, furniture, maintenance supplies,
and duplicating equipment. In some cases, the GSA operates retail-like stores,
where any federal buyer can go to purchase equipment and supplies. The GSA has
enormous purchasing power, managing more than one-fourth of the government’s
total procurement dollars.36
Under the Federal Supply Schedule Program, departments within the government may purchase specified items from an approved supplier at an agreed-on price.
This program provides federal agencies with the sources of products such as furniture,
appliances, office equipment, laboratory equipment, and the like. Once a supplier has
bid and been approved, the schedule may involve an indefinite-quantity contract for a
34 Defense Logistics Agency, “Facts and Figures,” accessed at http://www.dla.mil on June 10, 2008.
35 U.S. General Services Administration, “Doing Business with the GSA” (Washington, D.C., 1996).
36 U.S. General Services Administration, “GSA Details FY09 Budget Request,” accessed at
10, 2008.
http://www.gsa.gov on June
52
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The Environment of Business Marketing
term of 1 to 3 years. The schedule permits agencies to place orders directly with suppliers. Like corporate purchasing units, the GSA is using the Internet to streamline
purchasing processes and to facilitate communication with suppliers (see http://www
.gsa.gov).
Federal Buying
The president may set the procurement process in motion when he signs a congressional appropriation bill, or an accountant in the General Accounting Office may
initiate the process by requesting a new desktop computer. Business marketers can
identify the current needs of government buyers by consulting FedBizOpps ( FBO) at
http://www.fbodaily.com. The FBO, published by the Department of Commerce,
lists all government procurement proposals, subcontracting leads, contract awards,
and sales of surplus property. A potential supplier has at least 30 days to respond before bid opening. By law, all intended procurement actions of $10,000 or more, both
civilian and military, are published in the FBO. Copies of the FBO are available at
various government field offices, as well as local public libraries.
Once a procurement need is documented and publicly announced, the government follows one of two general procurement strategies: formal advertising (also
known as open bid) or negotiated contract.
Formal Advertising Formal advertising means the government solicits bids from
appropriate suppliers; usually, the lowest bidder is awarded the contract. This strategy is followed when the product is standardized and the specifications straightforward. The interested supplier must gain a place on a bidder’s list (or monitor the
FBO on a daily basis—which suggests that a more effective approach is to get on
the bidder’s list by filing forms available from the GSA Business Service Centers).
Then, each time the government requests bids for a particular product, the supplier
receives an invitation to bid. The invitation to bid specifies the item and the quantity
to be purchased, provides detailed technical specifications, and stipulates delivery
schedules, warranties required, packing requirements, and other purchasing details.
The bidding firm bases its bid on its own cost structure and on the bids it believes its
competitors might make.
Procurement personnel review each bid for conformance to specifications.
Contracts are generally awarded to the lowest bidder; however, the government
agency may select the next-to-lowest bidder if it can document that the lowest bidder would not responsibly fulfill the contract. For example, the Internal Revenue
Service (IRS) held a reverse auction for 11,000 desktop PCs and 16,000 notebook
PCs. The prebid pricing started at $130 million; when the auction closed, the price
was down to $63.4 million.37
Negotiated Contract Buying A negotiated contract is used to purchase products
and services that cannot be differentiated on the basis of price alone (such as complex
scientific equipment or R&D projects) or when there are few suppliers. There may
be some competition because the contracting office can conduct negotiations with
several suppliers simultaneously.
37 Richard Walker and Kevin McCaney, “Reverse Auctions Win Bid of Acceptance,” Buyers.Gov (December 2001): p. 1.
Chapter 2
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53
Obviously, negotiation is a much more flexible procurement procedure; the government buyers may exercise considerable personal judgment. Procurement is based
on the more subjective factors of performance and quality, as well as on price. The
procurement decision for the government is much like that of the large corporation:
Which is the best possible product at the lowest price, and will the product meet performance standards?
For example, the U.S. Army and Marines are together planning to replace the
Humvee transports used in Iraq with a Joint Light Tactical Vehicle.38 Lockheed
Martin Corporation and Boeing Company, the two largest U.S. defense contractors,
are each competing for the contract, along with a formidable set of rival teams led
by General Dynamics Corporation, BAE Systems, Northrop Grumman Corporation,
and Raytheon Company, respectively. From this field of competitors, three development contracts will be awarded first. That will set the stage for a competition in 2011
where each of the three rivals will demonstrate the performance and reliability of its
vehicle. The stakes are high: The winner will receive a $40 billion order to supply
60,000 vehicles over the next decade.
A Different Strategy Required
A marketer positioned to sell to the government has a much different marketing strategy focus than does a firm that concentrates on the commercial sector. The government seller emphasizes (1) understanding the complex rules and standards that must
be met; (2) developing a system to keep informed of each agency’s procurement plans;
(3) generating a strategy for product development and R&D that facilitates the firm’s
response to government product needs; (4) developing a communications strategy that
focuses on how technology meets agency objectives; and (5) generating a negotiation
strategy to secure favorable terms regarding payment, contract completion, and cost
overruns due to changes in product specifications.
The Institutional Market: Unique
Characteristics
Institutional customers comprise the third sector of the business market. Institutional
buyers make up a sizable market—total expenditures on public elementary and secondary schools alone exceed $500 billion, and national health expenditures exceed
$1.9 trillion.39 Schools and health-care organizations make up a sizable component
of the institutional market, which also includes colleges and universities, libraries,
foundations, art galleries, and clinics. On the one hand, institutional purchasers are
similar to governments in that the purchasing process is often constrained by political
considerations and dictated by law. In fact, many institutions are administered by government units—schools, for example. On the other hand, other institutions are privately operated and managed like corporations; they may even have a broader range
of purchase requirements than their large corporate counterparts. Like the commercial enterprise, institutions are ever cognizant of the value of efficient purchasing.
38 Edmond Lococo, “Lockheed, Boeing Brains Fizzle in Humvee-Heir Bid (Updated),” Bloomberg.com June 4, 2008,
accessed at http://www.bloomberg.com on June 5, 2008.
39 U.S. Census Bureau, Statistical Abstract of the United States: 2008, accessed at http://www.census.gov on June 12, 2008.
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Part I
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Institutional Buyers: Purchasing Procedures
Diversity is the key element in the institutional market. For example, the institutional
marketing manager must first be ready to respond to a school purchasing agent who
buys in great quantity for an entire city’s school system through a formal bidding procedure and then respond to a former pharmacist who has been elevated to purchasing
agent for a small rural hospital.
Health-care institutions provide a good example of the diversity of this market.
Some small hospitals delegate responsibility for food purchasing to the chief dietitian.
Although many of these hospitals have purchasing agents, the agent cannot place an
order unless the dietitian approves it. In larger hospitals, decisions may be made by
committees composed of a business manager, purchasing agent, dietitian, and cook.
In still other cases, hospitals may belong to buying groups consisting of many local
hospitals or meal preparation may be contracted out. In an effort to contain costs,
purchasing executives at large hospitals are adopting a supply chain focus and using
sophisticated supplier evaluation methods, including e-procurement tools, like their
counterparts in the commercial sector. Because of these varied purchasing environments, successful marketers usually maintain a separate marketing manager, staff, and
sales force to tailor marketing efforts to each situation.
For many institutions, once a department’s budget has been established, the department attempts to spend up to that budget limit. So, institutions may buy simply
because there are unused funds in the budget. A business marketer should carefully
evaluate the budgetary status of potential customers in the institutional segment of
the market.
Because many institutions face strong budgetary pressures, they often outsource segments of their operations to specialists to enhance efficiency and effectiveness. School districts may look to third-party contractors to purchase food and
supplies and to manage their meal service operations. For example, in Los Angeles,
Marriott Corporation manages food service operations at the city’s charter schools,
and in Chicago, three different contract companies each operate 10 food-preparation
departments.40 Many universities have turned over operation of their bookstores and
beverage contracts and management of their student unions to outside contractors.
Business marketers must carefully analyze and understand the operational strategy
of their institutional customers. Frequently, extensive sales and marketing attention
must center on the third-party contract operators.
Targeted Strategy The institutional market offers some unique applications for the
concept of multiple buying influences (discussed in Chapter 1). Many institutions are
staffed with professionals—doctors, professors, researchers, and others. In most cases, depending on size, the institution employs a purchasing agent and, in large institutions, a
sizable and skilled purchasing department or materials management department. There is
great potential for conflict between those responsible for purchasing and the professional
staff for whom the purchasing department is buying. Often, the salesperson must carefully
cultivate the professional staff in terms of product benefits and service while developing
a delivery timetable, maintenance contract, and price schedule to satisfy the purchasing
department. Leading business marketers also use the Internet to provide added value to
40 Susie Stephenson, “Schools,” Restaurants and Institutions 106 (August 1, 1996): pp. 60–64.
Chapter 2
FIGURE 2.5
The Business Market: Perspectives on the Organizational Buyer
55
GE HEALTHCARE RE-IMAGINED ADVERTISING: HOW DO YOU CAPTURE
A STILL IMAGE OF SOMETHING THAT NEVER SITS STILL?
SOURCE: © 2008 General Electric Company. All rights reserved. Reprinted by permission from General Electric
Company. Accessed at http://www.ge.com/company/advertising/ads_healthcare.html.
their customers. For example, GE Healthcare, a leader in medical imaging and diagnostics
equipment (see Figure 2.5), has embraced e-commerce as the centerpiece of its marketing strategy and provides an online catalog, daily Internet specials, and a host of services
for its customers—purchasing managers at hospitals and health-care facilities worldwide.
In fact, GE and the University of Pittsburgh Medical Center have formed a company to
move the laboratory analysis of human tissue into the digital age.41 Following a routine
that has changed little in the past century, the vast majority of tissue samples are viewed
individually by doctors using a microscope. The goal of this new venture is to create and
market a “virtual microscope” that would scan and store images electronically, improving
patient care by making it easier for doctors to share information.
Group Purchasing An important factor in institutional purchasing is group purchasing. Hospitals, schools, and universities may join cooperative purchasing associations to obtain quantity discounts. Universities affiliated with the Education and
Institutional Purchasing Cooperative enjoy favorable contracts established by the
cooperative and can purchase a wide array of products directly from vendors at the
low negotiated prices. The cooperative spends more than $100 million on goods
41 Scott Thurm, “GE Venture to Develop ‘Virtual Microscope’,” The Wall Street Journal, June 5, 2008, p. B5.
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Part I
The Environment of Business Marketing
FIGURE 2.6
A MARKET-CENTERED ORGANIZATION
Marketing
Vice-President
Marketing
Research
Manager
Advertising
Manager
Sales
Manager
Markets
Manager
Commercial
Market
Specialist
Government
Market
Specialist
Institutional
Market
Specialist
annually. Cooperative buying allows institutions to enjoy lower prices, improved
quality (through improved testing and vendor selection), reduced administrative cost,
standardization, better records, and greater competition.
Hospital group purchasing represents a significant market exceeding $10 billion.
Group purchasing has become widely accepted: More than one-third of public-sector
hospitals in the United States are members of some type of affiliated group. Most
hospital group purchasing is done at the regional level through hospital associations.
However, for-profit hospital chains, which are a growing factor in the health-care
field, also engage in group buying. For example, a multihospital system with a $1 billion
operating budget spends $300 to $500 million a year on medical supplies and purchased services. By channeling purchases through group purchasing organizations,
these large buyers are reaping significant savings.42
Group purchasing poses special challenges for the business marketer. The marketer must develop not only strategies for dealing with individual institutions but also
unique strategies for the special requirements of cooperative purchasing groups and
large hospital chains. The buying centers—individual institution versus cooperative
purchasing group—may vary considerably in composition, criteria, and level of expertise. For the purchasing groups, discount pricing assumes special importance. Suppliers who sell through purchasing groups must also have distribution systems that
effectively deliver products to individual group members. And even though vendors
have a contract with a large cooperative association, they must still be prepared to respond individually to each institution that places an order against the contract.
Institutional Purchasing Practices In many respects the purchasing practices of large
institutions are similar to those of large commercial firms, but there are some important
differences. The policies regarding cooperative buying, preference for local vendors, and
the delegation of purchasing responsibility for food, pharmaceuticals, and many other
42 Timothy L. Chapman, Ajay Gupta, and Paul O. Mange, “Group Purchasing Is Not a Panacea for U.S. Hospitals,”
McKinsey Quarterly, no. 1 (1998): p. 160.
Chapter 2
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57
items are of particular importance. The business marketer must understand these characteristics to carefully develop effective strategies for these institutional customers.
Dealing with Diversity:
A Market-Centered Organization
Because each sector of the business market is unique, many firms have built market
specialization into the marketing organization. To illustrate, the industrial products
area of the J. M. Smucker Company is organized around market sectors. The institutional, military, and business markets are each managed by different individuals, each
thoroughly knowledgeable about one particular market.
Figure 2.6 illustrates one form of a market-centered organizational scheme. Observe
that a market manager supervises and coordinates the activities of three market specialists. Each market specialist examines the buying processes, the product preferences, and
the similarities and differences between customers in one sector of the business market. Such an analysis enables the market specialist to further categorize customers in a
particular sector into meaningful market segments and to design specialized marketing
programs for each. A market-centered organization provides the business marketer with
a structure for dealing effectively with diversity in the business market.
Summary
In business-to-business marketing, the customers are organizations. The business
market can be divided into three major sectors: commercial enterprises, governments
(federal, state, and local), and institutions. Many business marketers—for example,
Intel, Boeing, and IBM—generate a significant proportion of their sales and profit by
serving international customers. Indeed, the demand for many industrial products is
growing more rapidly in many foreign countries than in the United States.
Commercial enterprises include manufacturers, construction companies,
service firms, transportation companies, selected professional groups, and resellers.
Of these, manufacturers account for the largest dollar volume of purchases. Furthermore, although the majority of manufacturing firms are small, buying power is
concentrated in the hands of relatively few manufacturers, which are also concentrated geographically.
Commercial enterprises, such as service establishments and transportation or utility companies, are more widely dispersed. A purchasing manager or purchasing agent
administers the procurement process. In large firms, the purchasing function has been
quite specialized. In addition to protecting the cost structure of the firm, improving
quality, and keeping inventory investment to a minimum, purchasing assumes a central role in managing relationships with suppliers. In turn, leading-edge organizations
like Dell Computer demonstrate the critical role that purchasing and supply chain
management can assume in creating profit opportunities. Rather than devoting exclusive attention to “buying for less,” leading organizations tie purchasing activities
directly to corporate strategy and use a range of sophisticated e-procurement tools.
Governmental units also make substantial purchases of products. Government
buyers use two general purchasing strategies: the formal advertising approach for
standardized products and negotiated contracts for those with unique requirements.
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Institutional customers, such as health-care organizations and universities, comprise
the third sector of the business market. Depending on size, the institution employs a
purchasing agent and, in large institutions, a sizable purchasing department. Across
business market sectors, purchasing managers are using the Internet to identify potential suppliers, conduct online reverse auctions, and communicate with suppliers.
Diversity is the characteristic that typifies the institutional market. The characteristics, orientations, and purchasing processes of institutional buyers are somewhere
between commercial enterprises and government buyers. Cooperative purchasing—a
unique aspect of this segment—necessitates a special strategic response by potential
suppliers. Many business marketers have found that a market-centered organization
provides the specialization required to meet the needs of each market sector.
Discussion Questions
1. A small manufacturer developed a new high-speed packaging system
that could be appealing to food-processing firms like Pillsbury and
General Mills. This new packaging system is far more efficient but
must be priced 15 percent higher than competitors’ products. Because
purchasing managers evaluate the “total cost of ownership” of major
purchases, what selling points should the business marketer emphasize
to demonstrate the superiority of this new product?
2. Honda of America relies on 400 suppliers in North America to provide
more than 60 percent of the parts and materials for the Accord. What
strategies could a business marketer follow in becoming a new supplier
to Honda? What criteria would Honda consider in evaluating suppliers?
3. Describe the total-cost-of-ownership orientation that purchasing
managers use and illustrate how you could apply it to your next
automobile purchase decision.
4. Segmentation is a tool that marketers use to identify target markets.
Increasingly, purchasing managers are using the segmentation approach
to determine which suppliers are most critical to the goals of the
organization. Explain.
5. Compare and contrast the two general procurement strategies employed
by the federal government: (1) formal advertising and (2) negotiated
contract.
6. Institutional buyers fall somewhere between commercial enterprises
and government buyers in terms of their characteristics, orientation,
and purchasing process. Explain.
7. Explain how the decision-making process that a university might employ
in selecting a new computer would differ from that of a commercial
enterprise. Who would be the key participants in the process in each
setting?
8. Fearing red tape and mounds of paperwork, Tom Bronson, president
of B&E Electric, has always avoided the government market. A recent
discussion with a colleague, however, has rekindled Tom’s interest in
Chapter 2
The Business Market: Perspectives on the Organizational Buyer
59
this sector. What steps should B&E Electric take to learn more about
this market?
9. General Electric (GE) has embraced e-purchasing and has saved more
than $500 million per year by conducting online reverse auctions in
buying a range of goods, including office, computer, and maintenance
supplies. What new challenges and opportunities does this auctioning
process present for business marketers who serve GE?
10. One purchasing executive observed, “Online auctioning is an appropriate
way to buy some categories of products and services but it’s entirely
inappropriate for others.” Agree or disagree? Provide support for your
position.
Internet Exercises
1. GE Healthcare has developed an e-commerce initiative to support
its marketing strategy, which targets health-care organizations on a
worldwide basis. Go to http://www.gemedicalsystems.com and
a. identify the products and services that the GE unit offers, and
b. provide a critique of the Web site and consider the degree to which it
provides access to the information that a potential buyer might want.
2. Ariba, Inc., is a leading provider of e-procurement software solutions.
Go to http://www.ariba.com and
a. describe the key products and services that the firm offers to its
customers, and
b. review a case history that describes a particular customer and how it
has applied one of Ariba’s procurement solutions.
CASE
Sealed Air Corporation: Delivering Packaging Solutions43
Sealed Air Corporation is a global leader in providing business customers with performance solutions for food, protective, and specialty packaging. Best known for its
BubbleWrap® cushioning material, the firm has pioneered a number of packaging innovations that have sustained a remarkable pattern of sales growth for more than two
decades. Using a consultative selling approach, field sales and technical support specialists at Sealed Air incorporate both packaging materials and specialized equipment
to provide a complete packaging solution for customers, providing superior protection against shock, abrasion, and vibration, compared with other forms of packaging.
Let’s explore the packaging solution that Sealed Air developed for Davis Neon Inc., a
wholesale neon sign manufacturer in Heath Springs, South Carolina.
Protecting custom-made neon signs that are shipped worldwide is a challenging problem for Dave Lytle, shipping manager at Davis Neon. “We were using preformed polyethylene foam sheets, which required a lot of storage space and time to unload from the
trucks,” noted Lytle. “We were keeping our eyes open for an alternative packaging method
which would provide comparable protection, yet reduce costs and increase productivity.”
After evaluating several alternatives, Dave Lytle chose a solution proposed by
Sealed Air to package the neon signs—Instapak Continuous Foam Tubes made by
Sealed Air’s SpeedyPacker Insight system. Using the SpeedyPacker equipment, now
installed in the shipping area at Davis Neon, an operator can create numerous variations of foam bags at the touch of a button. For each neon sign, Davis Neon employees create a custom-made wooden crate with dimensions just large enough to house
the sign. The packager then puts a layer of foam tubes, made-to-order by the Speedy
Packer equipment, on the bottom of the crate to form a pad. BubbleWrap cushioning
is used on the back of the sign, between rows, and on the side to provide surface protection and prevent abrasion of the sign against the crate. Another layer of foam tubes
is added on top before the lid is attached to the crate.
Before implementing the Sealed Air solution, packagers used preformed polyethylene foam sheets, each of which had to be cut by hand to fit the crate for the bottom pad
and top layer, as well as to fit in between the letters on the neon sign. “The preformed
polyethylene foam sheets took a long time to cut, were expensive, and produced significant material waste,” stated Lytle. “After working with the new packaging system, the
actual savings are 62 percent in material costs. We have also seen productivity increase
by 20 percent.” Employees at Davis are now able to pack more crates in less time.
Discussion Questions
1. Given the significant value that Sealed Air can provide for a customer, like Davis
Neon Inc., what approach should they follow in pricing a particular packaging
solution for a customer?
2. Develop a list of other types of customers who face special packaging challenges
and may represent promising customer prospects for Sealed Air to target.
43 Case History, “Sealed Air Sheds Light on Davis Neon’s Packaging,” accessed at www.sealedair.com on June 6, 2008.
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II
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IN BUSINESS MARKETING
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CHAPTER
3
Organizational Buying Behavior
A wide array of forces inside and outside the organization influence the organizational buyer. Knowledge of these forces provides the marketer with a foundation
for responsive business marketing strategies. After reading this chapter, you will
understand:
1. the decision process organizational buyers apply as they confront differing
buying situations and the resulting strategy implications for the business
marketer.
2. the individual, group, organizational, and environmental variables that
influence organizational buying decisions.
3. a model of organizational buying behavior that integrates these important
influences.
4. how a knowledge of organizational buying characteristics enables the marketer to make more informed decisions about product design, pricing, and
promotion.
63
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FIGURE 3.1
WANT TO WIN THE SUPPORT OF BUYING INFLUENTIALS? ENHANCE THEIR
CUSTOMERS’ EXPERIENCE
As a leading supplier to foreign and domestic automakers, Johnson Controls centers marketing
research and R&D investments on making the automotive experience safer and more pleasurable
for drivers. As a result, design engineers are eager to enhance customer value by incorporating
the firm’s components in new models.
To spark innovation, Johnson Controls’ R&D processes include:
• Human Factor Studio, where seating, electronics, and interior components are tested
based on ease of reach, usability, and function, giving special attention to ergonomic
positioning.
• Comfort Lab, which takes vehicle passengers on a road trip via simulator that generates
the bumps, dips, and turns of an open-road drive. Here, automakers can even analyze
prototype designs before production.
• Wave Lab, where the acoustic and vibration properties of automotive interior components
can be tested to remove, by design, sounds that cause annoyance or displeasure. The ultimate
goal: providing design engineers and their customers—auto buyers—quieter and more
comfortable automobile interiors.
SOURCES: “JCI Labs Spark Innovation: Improving the Customer Experience through Research and Development,”
accessed at http://www.johnsoncontrols.com on December 4, 2008; and “Beyond Bunsen Burners: Science Takes New
Forms at Johnson Controls’ Innovative Testing Labs,” accessed at http://www.johnsoncontrols.com on December 4, 2008.
Market-driven business firms continuously sense and act on trends in their markets. Consider Johnson Controls, Inc., a diverse, multi-industry company that is a leading supplier
of auto interiors (including seats, electronics, headliners, and instrument panels) to manufacturers.1 The striking success of the firm rests on the close relationships that its sales reps
and marketing managers have formed with design engineers and purchasing executives in
the auto industry. To illustrate, some of Johnson Controls’ salespersons work on-site with
design teams at Ford, GM, or Honda. To provide added value to the new-product-design
process, the firm also invests annually in market research on the needs and preferences of
auto buyers—the customer’s customer! (Figure 3.1) For example, based on extensive research about how families spend their time in cars, Johnson Controls developed a unique
rear seat entertainment system that allows passengers to play video games, watch DVDs,
or listen to CDs through wireless headphones or the vehicle’s speaker system. Moreover,
to enhance the customer experience, technicians at Johnson Controls’ research lab test
seating and interior components for comfort, safety, ease-of-reach, usability, and function. Using a simulator that generates the bumps, dips, and turns of an open-road drive,
scientists can record the passengers’ experience and capture valuable information for developing components that improve comfort and safety as well as customer satisfaction.
By staying close to the needs of auto buyers, Johnson Controls became the preferred
supplier to design engineers who are continually seeking innovative ways to make auto
interiors more distinctive and inviting.
1 “JCI Labs Spark Innovation,” accessed at http://www.johnsoncontrols.com on June 3, 2008.
Chapter 3
FIGURE 3.2
Organizational Buying Behavior
65
MAJOR STAGES OF THE ORGANIZATIONAL BUYING PROCESS
Stage
Description
1. Problem Recognition
Managers at P&G need new high-speed packaging equipment to
support a new product launch.
2. General Description of Need
Production managers work with a purchasing manager to determine
the characteristics needed in the new packaging system.
3. Product Specifications
An experienced production manager assists a purchasing manager in
developing a detailed and precise description of the needed equipment.
4. Supplier Search
After conferring with production managers, a purchasing manager
identifies a set of alternative suppliers that could satisfy P&G’s
requirements.
5. Acquisition and Analysis of Proposals
Alternative proposals are evaluated by a purchasing manager and
a number of members of the production department.
6. Supplier Selection
Negotiations with the two finalists are conducted, and a supplier is
chosen.
7. Selection of Order Routine
A delivery date is established for the production equipment.
8. Performance Review
After equipment is installed, purchasing and production managers
evaluate the performance of the equipment and the service support
provided by the supplier.
Understanding the dynamics of organizational buying behavior is crucial for identifying profitable market segments, locating buying influences within these segments, and
reaching organizational buyers efficiently and effectively with an offering that responds
to their needs. Each decision the business marketer makes is based on organizational
buyers’ probable response. This chapter explores the key stages of the organizational
buying process and isolates the salient characteristics of different purchasing situations.
Next, attention turns to the myriad forces that influence organizational buying behavior. Knowledge of how organizational buying decisions are made provides the business
marketer with a solid foundation for building responsive marketing strategies.
The Organizational Buying Process
Organizational buying behavior is a process, not an isolated act or event. Tracing the
history of a procurement decision uncovers critical decision points and evolving information requirements. In fact, organizational buying involves several stages, each of which
yields a decision. Figure 3.2 lists the major stages in the organizational buying process.2
2 The discussion in this section is based on Patrick J. Robinson, Charles W. Faris, and Yoram Wind, Industrial Buying
and Creative Marketing (Boston: Allyn and Bacon, 1967), pp. 12–18; see also Jeffrey E. Lewin and Naveen Donthu, “The
Influence of Purchase Situations on buying Center Structure and Investment: A Select Meta-Analysis of Organizational
Buying Behavior Research,” Journal of Business Research 58 (October 2005), pp. 1381–1390; and Morry Ghingold and
David T. Wilson, “Buying Center Research and Business Marketing Practice: Meeting the Challenge of Dynamic
Marketing,” Journal of Business & Industrial Marketing, 13 (2, 1998): pp. 96–108.
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The purchasing process begins when someone in the organization recognizes a
problem that can be solved or an opportunity that can be captured by acquiring a
specific product. Problem recognition can be triggered by internal or external forces.
Internally, a firm like P&G may need new high-speed production equipment to support a new product launch. Or a purchasing manager may be unhappy with the price
or service of an equipment supplier. Externally, a salesperson can precipitate the need
for a product by demonstrating opportunities for improving the organization’s performance. Likewise, business marketers also use advertising to alert customers to
problems and demonstrate how a particular product may solve them.
During the organizational buying process, many small or incremental decisions
are made that ultimately translate into the final choice of a supplier. To illustrate, a
production manager might unknowingly establish specifications for a new production
system that only one supplier can meet (Stages 2 and 3). This type of decision early
in the buying process dramatically influences the favorable evaluation and ultimate
selection of that supplier.
The Search Process
Once the organization has defined the product that meets its requirements, attention
turns to this question: Which of the many possible suppliers are promising candidates? The organization invests more time and energy in the supplier search when
the proposed product has a strong bearing on organizational performance. When the
information needs of the buying organization are low, Stages 4 and 5 occur simultaneously, especially for standardized items. In this case, a purchasing manager may
merely check a catalog or secure an updated price from the Internet. Stage 5 emerges
as a distinct category only when the information needs of the organization are high.
Here, the process of acquiring and analyzing proposals may involve purchasing managers, engineers, users, and other organizational members.
Supplier Selection and Performance Review After being selected as a chosen
supplier (Stage 6) and agreeing to purchasing guidelines (Stage 7), such as required
quantities and expected time of delivery, a marketer faces further tests. A performance
review is the final stage in the purchasing process. The performance review may lead
the purchasing manager to continue, modify, or cancel the agreement. A review critical of the chosen supplier and supportive of rejected alternatives can lead members
of the decision-making unit to reexamine their position. If the product fails to meet
the needs of the using department, decision makers may give further consideration to
vendors screened earlier in the procurement process. To keep a new customer, the
marketer must ensure that the buying organization’s needs have been completely satisfied. Failure to follow through at this critical stage leaves the marketer vulnerable.
The stages in this model of the procurement process may not progress sequentially and may vary with the complexity of the purchasing situation. For example,
some of the stages are compressed or bypassed when organizations make routine
buying decisions. However, the model provides important insights into the organizational buying process. Certain stages may be completed concurrently; the process
may be discontinued by a change in the external environment or in upper-management
thinking. The organizational buying process is shaped by a host of internal and external
forces, such as changes in economic or competitive conditions or a basic shift in organizational priorities.
Chapter 3
Organizational Buying Behavior
67
Organizations with significant experience in purchasing a particular product approach the decision quite differently from first-time buyers. Therefore, attention must
center on buying situations rather than on products. Three types of buying situations
have been delineated: (1) new task, (2) modified rebuy, and (3) straight rebuy.3
New Task
In the new-task buying situation, organization decisions makers perceive the problem or need as totally different from previous experiences; therefore, they need a significant amount of information to explore alternative ways of solving the problem and
searching for alternative suppliers.
When confronting a new-task buying situation, organizational buyers operate in
a stage of decision making referred to as extensive problem solving.4 The buying
influentials and decision makers lack well-defined criteria for comparing alternative
products and suppliers, but they also lack strong predispositions toward a particular
solution. In the consumer market, this is the same type of problem solving an individual or household might follow when buying a first home.
Buying-Decision Approaches5 Two distinct buying-decision approaches are used:
judgmental new task and strategic new task. The greatest level of uncertainty confronts firms in judgmental new-task situations because the product may be technically complex, evaluating alternatives is difficult, and dealing with a new suppliers has
unpredictable aspects. Consider purchasers of a special type of production equipment
who are uncertain about the model or brand to choose, the suitable level of quality,
and the appropriate price to pay. For such purchases, buying activities include a moderate amount of information search and a moderate use of formal tools in evaluating
key aspects of the buying decision.
Even more effort is invested in strategic new-task decisions. These purchasing decisions are of extreme importance to the firm strategically and financially. If
the buyer perceives that a rapid pace of technological change surrounds the decision,
search effort is increased but concentrated in a shorter time period.6 Long-range
planning drives the decision process. To illustrate, a large health insurance company
placed a $600,000 order for workstation furniture. The long-term effect on the work
environment shaped the 6-month decision process and involved the active participation of personnel from several departments.
3 Robinson, Faris, and Wind, Industrial Buying and Creative Marketing, chap. 1; see also Erin Anderson, Wujin Chu, and
Barton Weitz, “Industrial Purchasing: An Empirical Exploration of the Buyclass Framework,” Journal of Marketing
51 (July 1987): pp. 71–86; and Morry Ghingold, “Testing the ‘Buygrid’ Buying Process Model,” Journal of Purchasing
and Materials Management 22 (Winter 1986): pp. 30–36.
4 The levels of decision making discussed in this section are drawn from John A. Howard and Jagdish N. Sheth,
The Theory of Buyer Behavior (New York: John Wiley and Sons, 1969), chap. 2.
5 The discussion of buying decision approaches in this section is drawn from Michele D. Bunn, “Taxonomy of Buying
Decision Approaches,” Journal of Marketing 57 (January 1993): pp. 38–56; see also, Michele D. Bunn, Gul T. Butaney,
and Nicole P. Huffman, “An Empirical Model of Professional Buyers’ Search Effort,” Journal of Business-to-Business
Marketing 8 (4, 2001): pp. 55–81.
6 Allen M. Weiss and Jan B. Heide, “The Nature of Organizational Search in High Technology Markets,” Journal of
Marketing Research 30 (May 1993): pp. 230–233. See also, Christian Homburg and Sabine Kuester, “Towards an
Improved Understanding of Industrial Buying Behavior: Determinants of the Number of Suppliers,” Journal of
Business-to-Business Marketing 8 (2, 2001): pp. 5–29.
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Strategy Guidelines The business marketer confronting a new-task buying situation can gain a differential advantage by participating actively in the initial stages of
the procurement process. The marketer should gather information on the problems
facing the buying organization, isolate specific requirements, and offer proposals to
meet the requirements. Ideas that lead to new products often originate not with the
marketer but with the customer.
Marketers who are presently supplying other items to the organization (“in” suppliers) have an edge over other firms: They can see problems unfolding and are familiar with the “personality” and behavior patterns of the organization. The successful
business marketer carefully monitors the changing needs of organizations and is prepared to assist new-task buyers.
Straight Rebuy
When there is a continuing or recurring requirement, buyers have substantial experience in dealing with the need and require little or no new information. Evaluation of
new alternative solutions is unnecessary and unlikely to yield appreciable improvements. Thus, a straight rebuy approach is appropriate.
Routine problem solving is the decision process organizational buyers employ
in the straight rebuy. Organizational buyers apply well-developed choice criteria to
the purchase decision. The criteria have been refined over time as the buyers have developed predispositions toward the offerings of one or a few carefully screened suppliers. In the consumer market, this is the same type of problem solving that a shopper
might use in selecting 30 items in 20 minutes during a weekly trip to the supermarket. Indeed, many organizational buying decisions made each day are routine. For
example, organizations of all types are continually buying operating resources—the
goods and services needed to run the business, such as computer and office supplies,
maintenance and repair items, and travel services. Procter & Gamble alone spends
more than $5 billion annually on operating resources.7
Buying Decision Approaches Research suggests that organizational buyers employ
two buying-decision approaches: causal and routine low priority. Causal purchases involve no information search or analysis and the product or service is of minor importance. The focus is simply on transmitting the order. In contrast, routine low-priority
decisions are somewhat more important to the firm and involve a moderate amount of
analysis. Describing the purchase of $5,000 worth of cable to be used as component
material, a buyer aptly describes this decision-process approach:
On repeat buys, we may look at other sources or alternate methods of manufacturing, etc. to make sure no new technical advancements are available in
the marketplace. But, generally, a repeat buy is repurchased from the supplier
originally selected, especially for low dollar items.
Strategy Guidelines The purchasing department handles straight rebuy situations by
routinely selecting a supplier from a list of approved vendors and then placing an order.
As organizations shift to e-procurement systems, purchasing managers retain control of
the process for these routine purchases while allowing individual employees to directly
7 Doug Smock, “Strategic Sourcing: P&G Boosts Leverage,” Purchasing 133 (November 4, 2004): pp. 40–43.
Chapter 3
Organizational Buying Behavior
69
buy online from approved suppliers.8 Employees use a simple point-and-click interface
to navigate through a customized catalog detailing the offerings of approved suppliers,
and then order required items. Individual employees like the self-service convenience,
and purchasing managers can direct attention to more critical strategic issues. Marketing communications should be designed to reach not only purchasing managers but also
individual employees who are now empowered to exercise their product preferences.
The marketing task appropriate for the straight rebuy situation depends on
whether the marketer is an “in” supplier (on the list) or an “out” supplier (not among
the chosen few). An “in” supplier must reinforce the buyer-seller relationship, meet
the buying organization’s expectations, and be alert and responsive to the changing
needs of the organization.
The “out” supplier faces a number of obstacles and must convince the organization that it can derive significant benefits from breaking the routine. This can be difficult because organizational buyers perceive risk in shifting from the known to the
unknown. The organizational spotlight shines directly on them if an untested supplier
falters. Buyers may view testing, evaluations, and approvals as costly, time-consuming,
and unnecessary.
The marketing effort of the “out” supplier rests on an understanding of the basic buying needs of the organization: Information gathering is essential. The marketer must convince organizational buyers that their purchasing requirements have
changed or that the requirements should be interpreted differently. The objective
is to persuade decision makers to reexamine alternative solutions and revise the preferred list to include the new supplier.
Modified Rebuy
In the modified rebuy situation, organizational decision makers feel they can derive
significant benefits by reevaluating alternatives. The buyers have experience in satisfying the continuing or recurring requirement, but they believe it worthwhile to seek
additional information and perhaps to consider alternative solutions.
Several factors may trigger such a reassessment. Internal forces include the search
for quality improvements or cost reductions. A marketer offering cost, quality, or service improvements can be an external precipitating force. The modified rebuy situation is most likely to occur when the firm is displeased with the performance of
present suppliers (for example, poor delivery service).
Limited problem solving best describes the decision-making process for the
modified rebuy. Decision makers have well-defined criteria but are uncertain about
which suppliers can best fit their needs. In the consumer market, college students
buying their second computer might follow a limited problem-solving approach.
Buying-Decision Approaches Two buying-decision approaches typify this
buying-class category. Both strongly emphasize the firm’s strategic objectives and
long-term needs. The simple modified rebuy involves a narrow set of choice alternatives
and a moderate amount of both information search and analysis. Buyers concentrate
on the long-term-relationship potential of suppliers.
8 Talai Osmonbekov, Daniel C. Bello, and David I Gillilard, “Adoption of Electronic Commerce Tools in Business
Procurement: Enhanced Buying Center Structure and Processes,” Journal of Business & Industrial Marketing 17 (2/3,
2002): pp. 151–166.
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The complex modified rebuy involves a large set of choice alternatives and poses
little uncertainty. The range of choice enhances the buyer’s negotiating strength. The
importance of the decision motivates buyers to actively search for information, apply sophisticated analysis techniques, and carefully consider long-term needs. This
decision situation is particularly well suited to a competitive bidding process. For example, some firms are turning to online reverse auctions (one buyer, many sellers),
where the buying organization allows multiple suppliers to bid on a contract, exerting
downward price pressure throughout the process. To participate, suppliers must be
prepared to meet defined product characteristics, as well as quality and service standards. “And while price will always be an issue, more buyers today use reverse auctions to determine the best value.”9 Rather than being used for specialized products or
services where a close working relationship with the supplier is needed, auctions tend
to be used for commodities and standardized parts.
Strategy Guidelines In a modified rebuy, the direction of the marketing effort depends on whether the marketer is an “in” or an “out” supplier. An “in” supplier should
make every effort to understand and satisfy the procurement need and to move decision makers into a straight rebuy. The buying organization perceives potential payoffs
by reexamining alternatives. The “in” supplier should ask why and act immediately to
remedy any customer problems. The marketer may be out of touch with the buying
organization’s requirements.
The goal of the “out” supplier should be to hold the organization in modified
rebuy status long enough for the buyer to evaluate an alternative offering. Knowing
the factors that led decision makers to reexamine alternatives could be pivotal. A particularly effective strategy for an “out” supplier is to offer performance guarantees as
part of the proposal.10 To illustrate, the following guarantee prompted International
Circuit Technology, a manufacturer of printed circuit boards, to change to a new
supplier for plating chemicals: “Your plating costs will be no more than x cents per
square foot or we will make up the difference.”11 Given the nature of the production
process, plating costs can be easily monitored by comparing the square footage of
circuit boards moving down the plating line with the cost of plating chemicals for the
period. Pleased with the performance, International Circuit Technology now routinely reorders from this new supplier.
Strategy Implications Although past research provides some useful guidelines,
marketers must exercise great care in forecasting the likely composition of the buying
center for a particular purchasing situation.12 The business marketer should attempt
to identify purchasing patterns that apply to the firm. For example, the classes of industrial goods introduced in Chapter 1 (such as foundation goods versus facilitating
goods) involve varying degrees of technical complexity and financial risk for the buying organization.
9 James Carbone, “Not Just a Cost Reduction Tool,” Purchasing 134 (February 17, 2005): p. 43.
10 Mary Siegfried Dozbaba, “Critical Supplier Relationships: Converting Higher Performance,” Purchasing Today
(February 1999): pp. 22–29.
11 Somerby Dowst, “CEO Report: Wanted: Suppliers Adept at Turning Corners,” Purchasing 101 (January 29, 1987):
pp. 71–72.
12 Donald W. Jackson Jr., Janet E. Keith, and Richard K. Burdick, “Purchasing Agents’ Perceptions of Industrial Buying
Center Influence,” Journal of Marketing 48 (fall 1984): pp. 75–83.
Chapter 3
FIGURE 3.3
Organizational Buying Behavior
71
FORCES INFLUENCING ORGANIZATIONAL BUYING BEHAVIOR
Illustrative Dimensions
Environmental
Forces
• Economic Outlook: Domestic & Global
• Pace of Technological Change
• Global Trade Relations
Organizational
Forces
• Goals, Objectives, and Strategies
• Organizational Position of Purchasing
Group Forces
• Roles, relative influence, and patterns
of interaction of buying decision participants
Individual
Forces
• Job function, past experience, and buying
motives of individual decision partcipants
Organizational
Buying
Behavior
The business marketer must therefore view the procurement problem or need from
the buying organization’s perspective. How far has the organization progressed with
the specific purchasing problem? How does the organization define the task at hand?
How important is the purchase? The answers direct and form the business marketer’s
response and also provide insight into the composition of the decision-making unit.
Forces Shaping Organizational
Buying Behavior
The eight-stage model of the organizational buying process provides the foundation
for exploring the myriad forces that influence a buying decision by an organization.
Observe in Figure 3.3 how organizational buying behavior is influenced by environmental forces (for example, the growth rate of the economy); organizational forces (for
example, the size of the buying organization); group forces (for example, patterns of influence in buying decisions); and individual forces (for example, personal preferences).
Environmental Forces
A projected change in business conditions, a technological development, or a new
piece of legislation can drastically alter organizational buying plans. Among the environmental forces that shape organizational buying behavior are economic, political,
72
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Managing Relationships in Business Marketing
legal, and technological influences. Collectively, such environmental influences define
the boundaries within which buyer-seller relationships develop. Particular attention is
given to selected economic and technological forces that influence buying decisions.
Economic Influences Because of the derived nature of industrial demand, the marketer must be sensitive to the strength of demand in the ultimate consumer market. The
demand for many industrial products fluctuates more widely than the general economy. Firms that operate on a global scale must be sensitive to the economic conditions
that prevail across regions. For example, while the United States, western Europe, and
Japan may experience modest increases (for example, 2 or 3 percent) in gross domestic
product (GDP) in the years ahead, rapidly developing economies (RDEs) are projected
to grow three or four times as fast. In addition to China and India, key RDEs include
Mexico, Brazil, central and eastern Europe, and southeast Asia.13 A wealth of political
and economic forces dictate the vitality and growth of an economy. A recent study
found that the number of North American companies purchasing goods and services
from China, eastern Europe, and India has increased sharply in recent years and will
continue to rise.14 Best-in-class procurement organizations are twice as likely as their
competitors to emphasize low-cost-country sourcing strategies.15 Demonstrating this
trend, IBM recently moved its procurement headquarters to Shenzhen, China!
The economic environment influences an organization’s ability and, to a degree,
its willingness to buy. However, shifts in general economic conditions do not affect
all sectors of the market evenly. For example, a rise in interest rates may damage the
housing industry (including lumber, cement, and insulation) but may have minimal
effects on industries such as paper, hospital supplies, office products, and soft drinks.
Marketers that serve broad sectors of the organizational market must be particularly
sensitive to the differential effect of selective economic shifts on buying behavior.
Technological Influences Rapidly changing technology can restructure an industry and dramatically alter organizational buying plans. Notably, the World Wide
Web “has forever changed the way companies and customers (whether they be consumers or other businesses) buy and sell to each other, learn about each other, and
communicate.”16
The rate of technological change in an industry influences the composition of the
decision-making unit in the buying organization. As the pace of technological change
increases, the importance of the purchasing manager in the buying process declines.
Technical and engineering personnel tend to be more important when the rate of
technological change is great. Recent research also suggests that buyers who perceive
the pace of technological change to be more rapid (1) conduct more intense search
efforts and (2) spend less time on their overall search processes.17 Allen Weiss and
13 Satish Shankar, Charles Ormiston, Nicholas Bloch, Robert Schaus, and Vijay Vishwanath, “How to Win in Emerging
Markets,” MIT Sloan Management Review 49 (Spring 2008): pp. 19–23.
14 “Global Procurement Study Finds Companies Unprepared to Manage Increased Sourcing from China and India
Effectively,” accessed at http://www.atkearney.com on May 18, 2005.
15 Andrew Bartolini, “CPO Rising: The CPO’s Agenda for 2008,” February 2008, research report by the Aberdeen
Group, accessed at http://www.aberdeen.com on May 25, 2008.
16 Stewart Alsop, “e or Be Eaten,” Fortune, November 8, 1999, p. 87.
17 Weiss and Heide, “The Nature of Organizational Search,” pp. 220–233; see also Jan B. Heide and Allen M. Weiss,
“Vendor Consideration and Switching Behavior for Buyers in High-Technology Markets,” Journal of Marketing 59
(July 1995): pp. 30–43.
Chapter 3
Organizational Buying Behavior
73
Jan Heide suggest that “in cost-benefit terms, a fast pace of change implies that
distinct benefits are associated with search effort, yet costs are associated with prolonging the process” because the acquired information is “time sensitive.”18
The marketer must also actively monitor signs of technological change and be
prepared to adapt marketing strategy to deal with new technological environments.
For example, Hewlett-Packard has embraced the Internet in its products, services,
practices, and marketing. With search engines, spam filters, iPods, and other technologies, customers now have more control of the information they receive than ever
before, notes Scott Anderson, director of enterprise brand communication at HewlettPackard. In this dynamic environment, “our strategy is to engage our customers with
online interactions and content,” he says, pointing to the Web, e-mail, broadband,
and blogs as just some of the many electronic tools H-P uses.19 Similarly, Dell, Inc.,
now has an entire team dedicated to finding and responding to comments about Dell
on the Internet and to creating buzz among bloggers concerning forthcoming product releases.20 Because the most recent wave of technological change is as dramatic as
any in history, the implications for marketing strategists are profound. They involve
changing definitions of industries, new sources of competition, changing product life
cycles, and the increased globalization of markets.21
Organizational Forces
An understanding of the buying organization is based on its strategic priorities, the
role of purchasing in the executive hierarchy, and the firm’s competitive challenges.
Growing Influence of Purchasing As a rule, the influence of the procurement
function is growing. Why? Globalization is upsetting traditional patterns of competition, and companies are feeling the squeeze from rising material costs and stiff customer resistance to price increases. Meanwhile, to enhance efficiency and effectiveness,
many firms are outsourcing some functions that were traditionally performed within
the organization. As a result, at companies around the world, CEOs are counting on
the procurement function to keep their businesses strongly positioned in today’s intensively competitive marketplace.22
Strategic Priorities in Purchasing
As the influence of purchasing grows, chief procurement officers feel the heat of the
spotlight, so they are pursuing an ambitious set of strategic priorities (Table 3.1). They
seek cost savings but realize that such savings are only part of what procurement can
contribute to the bottom line. More importantly, however, procurement executives are
turning to a more strategic question: How can procurement become a stronger competitive weapon? Here attention centers on corporate goals and how procurement can
18 Weiss and Heide, “The Nature of Organizational Search,” p. 221.
19 Kate Maddox, Sean Callahan, and Carol Krol, “Top Trends: B-to-B Marketers Have Proven Remarkably Adaptable in
the Last Five Years,” B to B, June 13, 2005, p. 3, accessed at http://www.BtoBonline.com on July 7, 2005.
20 Ken Worthen, “Dell, by Going Click for Click with Web Posters, Ensured Bloggers Saw Its New Red Mini Laptop,”
Wall Street Journal, June 3, 2008, p. B6.
21 Rashi Glazer, “Winning in Smart Markets,” Sloan Management Review 40 (Summer 1999): pp. 56–69.
22 Marc Bourde, Charlie Hawker, and Theo Theocharides, “Taking Center Stage: The 2005 Chief Procurement Officer
Survey” (Somers, NY: IBM Global Services, May 2005), pp. 1–14, accessed at http://www.ibm.com/bcs on July 1, 2005.
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Managing Relationships in Business Marketing
TABLE 3.1
STRATEGIC PRIORITIES IN PURCHASING
Aligning Purchasing with Strategy:
Not Just Buyers
Exploring New Value Frontiers:
It’s Not Just about Price
Putting Suppliers Inside:
The Best Value Chain Wins
Pursuing Low-Cost Sources:
A World Worth Exploring
Shift from an administrative role to a value-creating
function that serves internal stakeholders and
provides a competitive edge in the market.
Focus on the capabilities of suppliers emphasizing
business outcomes, total cost of ownership, and the
potential for long-term value creation.
Develop fewer and deeper relationships with strategic
suppliers and involve them in decision-making
processes, ranging from new product development to
cost-reduction initiatives.
Overcome hurdles imposed by geographical
differences and seek out cost-effective suppliers
around the globe.
SOURCE: Adapted from Marc Bourde, Charlie Hawker, and Theo Theocharides, “Taking Center Stage: The 2005 Chief
Procurement Officer Survey,” (Somers, N.Y.: IBM Global Services, May 2005), pp. 1–14. Accessed at http://www.ibm.com/
bcs on July 1, 2005; and Chip W. Hardt, Nicholas Reinecke, and Peter Spiller, “Inventing the 21st-Century Purchasing
Organization,” The McKinsey Quarterly 2007, No. 4, pp. 115–124.
help their internal customers (that is, other business functions) achieve these goals. As
a direct participant in the strategy process, procurement managers are giving increased
emphasis to suppliers’ capabilities, exploring new areas where a strategic supplier can
add value to the firm’s product or service offerings. Robert K. Harlan, director of
e-procurement at Motorola, captures the idea: For new product development, “we
bring many suppliers in early to design, simplify, and implement new technologies.”23
Leading-edge purchasing organizations have also learned that the “best value
chain wins,” so they are building closer relationships with a carefully chosen set of strategic suppliers and aligning the activities of the supply chain with customers’ needs.24
For example, Honda of America reduced the cost of the Accord’s purchased content
by setting cost targets for each component—engine, chassis, and so on.25 Then, purchasing managers worked with global suppliers to understand the cost structure of
each component, observe how it is manufactured, and identify ways to reduce costs,
add value, or do both.
Offer Strategic Solutions As purchasing assumes a more strategic role, the business marketer must understand the competitive realities of the customer’s business
and develop a value proposition—products, services, ideas—that advance its performance goals. For example, IBM centers attention on customer solutions—how its information technology and assorted services can improve the efficiency of a retailer’s
operations or advance the customer service levels of a hotel chain. Alternatively, a
supplier to Hewlett-Packard will strike a responsive chord with executives by offering a new component that will increase the performance or lower the cost of its inkjet
printers. To provide such customer solutions, the business marketer needs an intimate understanding of the opportunities and threats that the customer confronts.
23 Jason Seigel, “Professional Profile: Robert K. Harlan,” Purchasing 13 (October 7, 2004): p. 32.
24 Mark Gottfredson, Rudy Puryear, and Stephen Phillips, “Strategic Sourcing: From Periphery to the Core,” Harvard
Business Review 83 (February 2005): pp. 132–139.
25 Timothy M. Laseter, Balanced Sourcing: Cooperation and Competition in Supplier Relationships (San Francisco: Jossey-Bass,
1998), pp. 5–18.
Chapter 3
Organizational Buying Behavior
75
Organizational Positioning of Purchasing
As purchasing moves from a transaction-based support role and assumes a more
prominent strategic spot at the executive level, many leading firms are centralizing
the procurement function. An organization that centralizes procurement decisions
approaches purchasing differently than a company in which purchasing decisions are
made at individual user locations. When purchasing is centralized, a separate organizational unit has authority for purchases at a regional, divisional, or headquarters
level. For example, by centralizing procurement, American Express realized nearly
$600 million in purchasing savings in the first three years.26 IBM, Sara Lee, 3M,
Hewlett-Packard, Wendy’s International, and Citicorp are among other corporations
that emphasize centralized procurement. A marketer who is sensitive to organizational influences can more accurately map the decision-making process, isolate buying influentials, identify salient buying criteria, and target marketing strategy for both
centralized, as well as decentralized, organizations.27
Centralization of Procurement: Contributing Factors Several factors contribute to the trend toward centralizing purchasing. First, centralization can better
integrate purchasing strategy with corporate strategy, and e-procurement software
tools now enable managers to monitor and analyze corporate spending data in minute
detail.28 Importantly, e-procurement software from firms such as Ariba, Inc. (http://
www.ariba.com) now provides buyers with a rich set of new tools to track and manage
spending across the entire enterprise. For example, the corporate procurement group
at Walt Disney Company manages spending on all items common to the entertainment firm’s four business units: media networks, parks and resorts, studio entertainment, and consumer products. These items include such categories as information
technology, telecommunications, construction services, and insurance.29
Second, an organization with multiple plant or office locations can often cut
costs by pooling common requirements. Before Motorola centralized its procurement
function, it had 65 different software agreements globally with one supplier for the
same software license.30 By negotiating a global agreement that covers all Motorola
operations around the world, the centralized procurement staff saved more than
$40 million, or about 50 percent of what the firm had been paying for the 65 different
agreements.
Third, the nature of the supply environment also can determine whether purchasing is centralized. If a few large sellers dominate the supply environment, centralized buying may be particularly useful in securing favorable terms and proper service.
If the supply industry consists of many small firms, each covering limited geographical areas, decentralized purchasing may achieve better support.
Finally, the location of purchasing in the organization often hinges on the location of key buying influences. If engineering plays an active role in the process, the
purchasing function must be in close organizational and physical proximity.
26 Susan Avery, “American Express Changes Ahead,” Purchasing 133 (November 4, 2004): pp. 34–38.
27 E. Raymond Corey, The Organizational Context of Industrial Buyer Behavior (Cambridge, MA: Marketing Science
Institute, 1978), pp. 99–112.
28 Tim A. Minahan, “Best Practices in E-Sourcing: Optimizing and Sustaining Supply Savings,” September 2004,
research report by Aberdeen Group, Inc., Boston, Massachusetts; accessed at http://www.ariba.com on June 15, 2005.
29 Anne Millen Porter, “Spend a Little, Save a Lot,” Purchasing 130 (April 4, 2002): pp. 23–34.
30 James Carbone, “Motorola Leverages Its Way to Lower Cost,” Purchasing 133 (September 16, 2004): p. 32.
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Centralization versus Decentralization Centralized and decentralized procurement differ substantially.31 Centralization leads to specialization. Purchasing specialists for selected items develop comprehensive knowledge of supply and demand
conditions, vendor options, supplier cost factors, and other relevant information. This
knowledge, and the significant volume of business that specialists control, enhances
their buying strength and supplier options.
The priority given to selected buying criteria is also influenced by centralization
or decentralization. By identifying the buyer’s organizational domain, the marketer
can generally identify the purchasing manager’s objectives. Centralized purchasing
units place more weight on strategic considerations such as long-term supply availability and the development of a healthy supplier complex. Decentralized buyers may
emphasize more tactical concerns such as short-term cost efficiency and profit considerations. Organizational buying behavior is greatly influenced by the monitoring
system that measures the performance of the unit.
Personal selling skills and the brand preferences of users influence purchasing decisions more at user locations than at centralized buying locations. At user locations,
E. Raymond Corey points out that “engineers and other technical personnel, in particular, are prone to be specific in their preferences, while nonspecialized, nontechnical buyers have neither the technical expertise nor the status to challenge them,”32
as can purchasing specialists at central locations. Differing priorities between central
buyers and local users often lead to conflict. In stimulating demand at the user level,
the marketer should assess the potential for conflict and attempt to develop a strategy
to resolve any differences between the two organizational units.
Strategy Response The organization of the marketer’s selling strategy should parallel the organization of the purchasing function of key accounts. To avoid disjointed
selling activities and internal conflict in the sales organization, and to serve the special
needs of important customers, many business marketers have developed key account
management programs to establish a close working relationship that, according to
Benson Shapiro and Rowland Moriarty, “cuts across multiple levels, functions, and
operating units in both the buying and selling organizations.”33 For example, IBM
assigns a dedicated account executive to work with large customers, like Boeing or
State Farm Insurance. Thus, the trend toward the centralization of procurement by
buyers has been matched by the development of key account management programs
by sellers. For large, multinational organizations that have the structure, processes,
and information systems to centrally coordinate purchases on a global scale, the
customer might be considered for global account management status. A global
account management program treats a customer’s worldwide operations as one integrated account, with coherent terms for pricing, service, and product specifications.34
31 Joseph A. Bellizzi and Joseph J. Belonax, “Centralized and Decentralized Buying Influences,” Industrial Marketing
Management 11 (April 1982): pp. 111–115; Arch G. Woodside and David M. Samuel, “Observation of Centralized
Corporate Procurement,” Industrial Marketing Management 10 (July 1981): pp. 191–205; and Corey, The Organizational
Context, pp. 6–12.
32 Corey, The Organizational Context, p. 13.
33 Benson P. Shapiro and Rowland T. Moriarty, National Account Management: Emerging Insights (Cambridge, MA:
Marketing Science Institute, 1982), p. 8; see also James Boles, Wesley Johnston, and Alston Gardner, “The Selection
and Organization of National Accounts: A North American Perspective,” Journal of Business & Industrial Marketing
14 (4, 1999): pp. 264–275.
34 George S. Yip and Audrey J. M. Bink, “Managing Global Accounts,” Harvard Business Review 85 (September 2007):
pp. 103–111.
Chapter 3
Organizational Buying Behavior
77
INSIDE BUSINESS MARKETING
Go Digital to Target Buying Influentials
Which firms are gaining an advantage in the
customer-empowered, competitive markets that
are being reshaped by the Internet? Those who
already excel at managing customer relationships
are best equipped to capitalize on the opportunities
of the Internet. Those relationship leaders are
able to anticipate earlier how to use the Internet
to connect with their customers, exploit it faster,
and implement strategy initiatives better. Best-ofbreed relationship builders, like Dell, FedEx, GE
Medical, and Singapore Airlines, relish the new
possibilities the Internet presents.
Consider the effective and low-cost strategy
that GE Medical uses in selling expensive,
mission-critical software through the digital
channel. Radiologists using GE’s diagnostic
imaging machines can go to the Internet and try
out new GE software that increases the efficiency
of spinal examinations. If they like what they see,
they can order the $65,000 software. About 65
percent of the time, radiologists elect to make the
purchase, without ever talking to a salesperson.
SOURCE: George S. Day and Katrina J. Hubbard, “Customer
Relationships Go Digital,” Business Strategy Review 14 (1, 2003):
pp. 17–26.
For example, Xerox and Hewlett-Packard each have over 100 corporate clients who
are given global account status.
Group Forces
Multiple buying influences and group forces are critical in organizational buying decisions. The organizational buying process typically involves a complex set of smaller
decisions made or influenced by several individuals. The degree of involvement of
group members varies from routine rebuys, in which the purchasing agent simply
takes into account the preferences of others, to complex new-task buying situations,
in which a group plays an active role.
The industrial salesperson must address three questions.
• Which organizational members take part in the buying process?
• What is each member’s relative influence in the decision?
• What criteria are important to each member in evaluating prospective suppliers?
The salesperson who can correctly answer these questions is ideally prepared to meet
the needs of a buying organization and has a high probability of becoming the chosen
supplier.
The Buying Center The concept of the buying center provides rich insights
into the role of group forces in organizational buying behavior.35 The buying center
35 For a comprehensive review of buying center research, see Wesley J. Johnston and Jeffrey E. Lewin, “Organizational
Buying Behavior: Toward an Integrative Framework,” Journal of Business Research 35 (January 1996): pp. 1–15; and
J. David Lichtenthal, “Group Decision Making in Organizational Buying: A Role Structure Approach,” in Advances in
Business Marketing, vol. 3, ed. Arch G. Woodside (Greenwich, CT: JAI Press, 1988), pp. 119–157.
78
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Managing Relationships in Business Marketing
consists of individuals who participate in the purchasing decision and share the goals
and risks arising from the decision. The size of the buying center varies, but an average buying center includes more than 4 persons per purchase; the number of people
involved in all stages of one purchase may be as many as 20.36
The composition of the buying center may change from one purchasing situation
to another and is not prescribed by the organizational chart. A buying group evolves
during the purchasing process in response to the information requirements of the
specific situation. Because organizational buying is a process rather than an isolated act,
different individuals are important to the process at different times.37 A design engineer may exert significant influence early in the process when product specifications
are being established; others may assume a more dominant role in later phases. A
salesperson must define the buying situation and the information requirements from
the organization’s perspective in order to anticipate the size and composition of the
buying center. Again, the composition of the buying center evolves during the purchasing process, varies from firm to firm, and varies from one purchasing situation to
another.
Isolating the Buying Situation Defining the buying situation and determining whether
the firm is in the early or later stages of the procurement decision-making process are
important first steps in defining the buying center. The buying center for a new-task
buying situation in the not-for-profit market is presented in Table 3.2. The product,
intensive-care monitoring systems, is complex and costly. Buying center members are
drawn from five functional areas, each participating to varying degrees in the process.
A marketer who concentrated exclusively on the purchasing function would be overlooking key buying influentials.
Erin Anderson and her colleagues queried a large sample of sales managers about
the patterns of organizational buying behavior their salespeople confront daily. Sales
forces that frequently encounter new-task buying situations generally observe that:
The buying center is large, slow to decide, uncertain about its needs and
the appropriateness of the possible solutions, more concerned about finding a good solution than getting a low price or assured supply, more willing
to entertain proposals from “out” suppliers and less willing to favor “in”
suppliers, more influenced by technical personnel, [and] less influenced by
purchasing agents.38
By contrast, Anderson and her colleagues found that sales forces facing more
routine purchase situations (that is, straight and modified rebuys) frequently observe
buying centers that are “small, quick to decide, confident in their appraisals of the
problem and possible solutions, concerned about price and supply, satisfied with ‘in’
suppliers, and more influenced by purchasing agents.”39
36 For example, see Robert D. McWilliams, Earl Naumann, and Stan Scott, “Determining Buying Center Size,” Industrial
Marketing Management 21 (February 1992): pp. 43–49.
37 Ghingold and Wilson, “Buying Center Research and Business Marketing Practice,” pp. 96–108; see also Gary L. Lilien
and M. Anthony Wong, “Exploratory Investigation of the Structure of the Buying Center in the Metalworking Industry,”
Journal of Marketing Research 21 (February 1984): pp. 1–11.
38 Anderson, Chu, and Weitz, “Industrial Purchasing,” p. 82.
39 Ibid.
Chapter 3
TABLE 3.2
Organizational Buying Behavior
79
THE INVOLVEMENT OF BUYING CENTER PARTICIPANTS AT DIFFERENT
STAGES OF THE PROCUREMENT PROCESS
Stages of Procurement Process for a Medical Supplier
Identification and
Buying Center
Identification Establishment
Evaluation of
Participants
of Need
of Objectives
Buying Alternatives
Selection
of Suppliers
Physicians
Nursing
Administration
Engineering
Purchasing
High
Low
High
Low
Moderate
High
Low
Moderate
Low
Low
High
High
Moderate
Moderate
Low
High
High
Moderate
Moderate
Low
SOURCE: Adapted by permission of the publisher from Gene R. Laczniak, “An Empirical Study of Hospital Buying,”
Industrial Marketing Management 8 ( January 1979): p. 61. Copyright © 1979 by Elsevier Science.
Predicting Composition A marketer can also predict the composition of the buying center by projecting the effect of the industrial product on various functional areas in the organization. If the procurement decision will affect the marketability of a
firm’s product (for example, product design, price), the marketing department will be
active in the process. Engineering will be influential in decisions about new capital
equipment, materials, and components; setting specifications; defining product performance requirements; and qualifying potential vendors. Manufacturing executives
will be included for procurement decisions that affect the production mechanism (for
example, materials or parts used in production). When procurement decisions involve
a substantial economic commitment or impinge on strategic or policy matters, top
management will have considerable influence.
Buying Center Influence Members of the buying center assume different roles
throughout the procurement process. Frederick Webster Jr. and Yoram Wind have
given the following labels to each of these roles: users, influencers, buyers, deciders,
and gatekeepers.40
As the role name implies, users are the personnel who use the product in question. Users may have anywhere from inconsequential to extremely important influence on the purchase decision. In some cases, the users initiate the purchase action by
requesting the product. They may even develop the product specifications.
Gatekeepers control information to be reviewed by other members of the buying center. They may do so by disseminating printed information, such as advertisements, or by controlling which salesperson speaks to which individuals in the buying
center. To illustrate, the purchasing agent might perform this screening role by opening the gate to the buying center for some sales personnel and closing it to others.
Influencers affect the purchasing decision by supplying information for the evaluation of alternatives or by setting buying specifications. Typically, those in technical
departments, such as engineering, quality control, and R&D, have significant influence on the purchase decision. Sometimes, outside individuals can assume this role.
40 Frederick E. Webster Jr. and Yoram Wind, Organizational Buying Behavior (Englewood Cliffs, NJ: Prentice-Hall,
1972), p. 77. For a review of buying role research, see Lichtenthal, “Group Decision Making in Organizational Buying,”
pp. 119–157.
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INSIDE BUSINESS MARKETING
Innovate and Win with BMW
Leading procurement organizations expect their
suppliers to innovate, and they reward them when
they do. At firms such as P&G, Coca-Cola, and
BMW, purchasing executives use “potential to
innovate” as a key criterion for selecting suppliers
and evaluate contributions to innovation as part of
the supplier development process.
Business marketers who contribute innovative
ideas to the new-product-development process
at such firms win the support of purchasing
managers, marketing executives, design engineers,
and other members of the buying center. For
example, a salesperson for a top supplier to BMW
proposed adding optic-fiber-enabled light rings
to headlights to add a distinguishing feature to
the brand. “Drivers on the German autobahn
or elsewhere would see the distinctive lights of
a high-performance BMW approaching from
behind and know to move aside and let it pass.
BMW and the supplier jointly developed the
idea—and the contract ensures exclusive rights for
the automaker.” As a result of this collaboration,
BMW gained access to new technology that adds
value to its brand and the supplier won a lucrative,
long-term contract.
SOURCE: A. T. Kearney, “Creating Value through Strategic
Supply Management: 2004 Assessment of Excellence in
Procurement,” (February 2005). Accessed at http://www
.atkearney.com on June 25, 2005.
For high-tech purchases, technical consultants often assume an influential role in the
decision process and broaden the set of alternatives being considered.41
Deciders actually make the buying decision, whether or not they have the formal
authority to do so. The identity of the decider is the most difficult role to determine:
Buyers may have formal authority to buy, but the president of the firm may actually
make the decision. A decider could be a design engineer who develops a set of specifications that only one vendor can meet.
The buyer has formal authority to select a supplier and implement all procedures
connected with securing the product. More powerful members of the organization often usurp the power of the buyer. The buyer’s role is often assumed by the purchasing
agent, who executes the administrative functions associated with a purchase order.
One person could assume all roles, or separate individuals could assume different
buying roles. To illustrate, as users, personnel from marketing, accounting, purchasing, and production may all have a stake in which information technology system is
selected. Thus, the buying center can be a very complex organizational phenomenon.
Identifying Patterns of Influence Key influencers are frequently located outside the
purchasing department. To illustrate, the typical capital equipment purchase involves
an average of four departments, three levels of the management hierarchy (for example, manager, regional manager, vice president), and seven different individuals.42
41 Paul G. Patterson and Phillip L. Dawes, “The Determinants of Choice Set Structure in High-Technology Markets,”
Industrial Marketing Management 28 (July 1999): pp. 395–411; and Philip L. Dawes, Don Y. Lee, and David Midgley,
“Organizational Learning in High-Technology Purchase Situations: The Antecedents and Consequences of the Participation of External IT Consultants,” Industrial Marketing Management 36 (April 2007): pp. 285–299.
42 Wesley J. Johnston and Thomas V. Bonoma, “The Buying Center: Structure and Interaction Patterns,” Journal of
Marketing 45 (Summer 1981): pp. 143–156; see also Gary L. Lilien and M. Anthony Wong, “An Exploratory Investigation of the Structure of the Buying Center in the Metalworking Industry,” Journal of Marketing Research 21 (February
1984): pp. 1–11; and Arch G. Woodside, Timo Liakko, and Risto Vuori, “Organizational Buying of Capital Equipment
Involving Persons across Several Authority Levels,” Journal of Business & Industrial Marketing 14 (1, 1999): pp. 30–48.
Chapter 3
TABLE 3.3
Organizational Buying Behavior
81
CLUES FOR IDENTIFYING POWERFUL BUYING CENTER MEMBERS
• Isolate the personal stakeholders. Those individuals who have an important personal stake
in the decision will exert more influence than other members of the buying center. For
example, the selection of production equipment for a new plant will spawn the active
involvement of manufacturing executives.
• Follow the information flow. Influential members of the buying center are central to the
information flow that surrounds the buying decision. Other organizational members will
direct information to them.
• Identify the experts. Expert power is an important determinant of influence in the buying
center. Those buying center members who possess the most knowledge—and ask the most
probing questions of the salesperson—are often influential.
• Trace the connections to the top. Powerful buying center members often have direct access to
the top-management team. This direct link to valuable information and resources enhances
the status and influence of the buying center members.
• Understand purchasing’s role. Purchasing is dominant in repetitive buying situations by virtue
of technical expertise, knowledge of the dynamics of the supplying industry, and close
working relationships with individual suppliers.
SOURCE: Adapted from John R. Ronchetto, Michael D. Hutt, and Peter H. Reingen, “Embedded Influence Patterns in
Organizational Buying Systems,” Journal of Marketing 53 (October 1989): pp. 51–62.
In purchasing component parts, personnel from production and engineering are often
most influential in the decision. It is interesting to note that a comparative study of
organizational buying behavior found striking similarities across four countries (the
United States, the United Kingdom, Australia, and Canada) in the involvement of
various departments in the procurement process.43
Past research provides some valuable clues for identifying powerful buying center members (Table 3.3).44 To illustrate, individuals who have an important personal
stake in the decision possess, expert knowledge concerning the choice, and/or are
central to the flow of decision-related information tend to assume an active and influential role in the buying center. Purchasing managers assume a dominant role in
repetitive buying situations.
Based on their buying center research, Donald W. Jackson Jr. and his colleagues
provide these strategy recommendations:
Marketing efforts will depend upon which individuals of the buying center are
more influential for a given decision. Because engineering and manufacturing
are more influential in product selection decisions, they may have to be sold
on product characteristics. On the other hand, because purchasing is most influential in supplier selection decisions, they may have to be sold on company
characteristics.45
43 Peter Banting, David Ford, Andrew Gross, and George Holmes, “Similarities in Industrial Procurement across Four
Countries,” Industrial Marketing Management 14 (May 1985): pp. 133–144.
44 John R. Ronchetto, Michael D. Hutt, and Peter H. Reingen, “Embedded Influence Patterns in Organizational
Buying Systems,” Journal of Marketing 53 (October 1989): pp. 51–62; see also Ajay Kohli, “Determinants of Influence
in Organizational Buying: A Contingency Approach,” Journal of Marketing 53 (July 1989): pp. 50–65; Daniel H.
McQuiston and Peter R. Dickson, “The Effect of Perceived Personal Consequences on Participation and Influence
in Organizational Buying,” Journal of Business Research 23 (September 1991): pp. 159–177; and Jerome M. Katrichis,
“Exploring Departmental Level Interaction Patterns in Organizational Purchasing Decisions,” Industrial Marketing
Management 27 (March 1998): pp. 135–146.
45 Jackson, Keith, and Burdick, “Purchasing Agents’ Perceptions of Industrial Buying Center Influence,” pp. 75–83.
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Individual Forces
Individuals, not organizations, make buying decisions. Each member of the buying
center has a unique personality, a particular set of learned experiences, a specified organizational function, and a perception of how best to achieve both personal and organizational goals. Importantly, research confirms that organizational members who
perceive that they have an important personal stake in the buying decision participate
more forcefully in the decision process than their colleagues.46 To understand the
organizational buyer, the marketer should be aware of individual perceptions of the
buying situation.
Differing Evaluative Criteria Evaluative criteria are specifications that organizational buyers use to compare alternative industrial products and services; however,
these may conflict. Industrial product users generally value prompt delivery and efficient servicing; engineering values product quality, standardization, and testing; and
purchasing assigns the most importance to maximum price advantage and economy in
shipping and forwarding.47
Product perceptions and evaluative criteria differ among organizational decision
makers as a result of differences in their educational backgrounds, their exposure to
different types of information from different sources, the way they interpret and retain
relevant information (perceptual distortion), and their level of satisfaction with past
purchases.48 Engineers have an educational background different from that of plant
managers or purchasing agents: They are exposed to different journals, attend different conferences, and possess different professional goals and values. A sales presentation that is effective with purchasing may be entirely off the mark with engineering.
Responsive Marketing Strategy A marketer who is sensitive to differences in
the product perceptions and evaluative criteria of individual buying center members is well equipped to prepare a responsive marketing strategy. To illustrate,
a research study examined the industrial adoption of solar air-conditioning systems and identified the criteria important to key decision makers.49 Buying center
participants for this purchase typically include production engineers, heating and
air-conditioning (HVAC) consultants, and top managers. The study revealed that
marketing communications directed at production engineers should center on operating costs and energy savings; HVAC consultants should be addressed concerning noise level and initial cost of the system; and top managers are most interested
in whether the technology is state-of-the-art. Knowing the criteria of key buying
center participants has significant operational value to the marketer when designing new products and when developing and targeting advertising and personal selling presentations.
46 McQuiston and Dickson, “The Effect of Perceived Personal Consequences on Participation and Influence in Organizational Buying,” pp. 159–177.
47 Jagdish N. Sheth, “A Model of Industrial Buyer Behavior,” Journal of Marketing 37 (October 1973): p. 51; see also
Sheth, “Organizational Buying Behavior: Past Performance and Future Expectations,” Journal of Business & Industrial
Marketing 11 (3/4, 1996): pp. 7–24.
48 Sheth, “A Model of Industrial Buyer Behavior,” pp. 52–54.
49 Jean-Marie Choffray and Gary L. Lilien, “Assessing Response to Industrial Marketing Strategy,” Journal of Marketing
42 (April 1978): pp. 20–31. For related research, see R. Venkatesh, Ajay K. Kohli, and Gerald Zaltman, “Influence Strategies in Buying Centers,” Journal of Marketing 59 (October 1995): pp. 71–82; and Mark A. Farrell and Bill Schroder,
“Influence Strategies in Organizational Buying Decisions,” Industrial Marketing Management 25 (July 1996): pp. 293–303.
Chapter 3
Organizational Buying Behavior
83
Information Processing Volumes of information flow into every organization
through direct-mail advertising, the Internet, journal advertising, trade news, word
of mouth, and personal sales presentations. What an individual organizational buyer
chooses to pay attention to, comprehend, and retain has an important bearing on procurement decisions.
Selective Processes Information processing is generally encompassed in the
broader term cognition, which U. Neisser defines as “all the processes by which the
sensory input is transformed, reduced, elaborated, stored, recovered, and used.”50
Important to an individual’s cognitive structure are the processes of selective exposure, attention, perception, and retention.
1. Selective exposure. Individuals tend to accept communication messages
consistent with their existing attitudes and beliefs. For this reason, a purchasing
agent chooses to talk to some salespersons and not to others.
2. Selective attention. Individuals filter or screen incoming stimuli to admit only
certain ones to cognition. Thus, an organizational buyer is more likely to notice
a trade advertisement that is consistent with his or her needs and values.
3. Selective perception. Individuals tend to interpret stimuli in terms of their
existing attitudes and beliefs. This explains why organizational buyers may
modify or distort a salesperson’s message in order to make it more consistent
with their predispositions toward the company.
4. Selective retention. Individuals tend to recall only information pertinent to their
own needs and dispositions. An organizational buyer may retain information
concerning a particular brand because it matches his or her criteria.
Each of these selective processes influences the way an individual decision maker
responds to marketing stimuli. Because the procurement process often spans several
months and because the marketer’s contact with the buying organization is infrequent, marketing communications must be carefully designed and targeted.51 Key
decision makers “tune out” or immediately forget poorly conceived messages. They
retain messages they deem important to achieving goals.
Risk-Reduction Strategies Individuals are motivated by a strong desire to reduce risk
in purchase decisions. Perceived risk includes two components: (1) uncertainty about the
outcome of a decision and (2) the magnitude of consequences from making the wrong
choice. Research highlights the importance of perceived risk and the purchase type in
shaping the structure of the decision-making unit.52 Individual decision making is likely
to occur in organizational buying for straight rebuys and for modified rebuys when the
perceived risk is low. In these situations, the purchasing agent may initiate action.53
Modified rebuys of higher risk and new tasks seem to spawn a group structure.
50 U. Neisser, Cognitive Psychology (New York: Appleton, 1966), p. 4.
51 See, for example, Brent M. Wren and James T. Simpson, “A Dyadic Model of Relationships in Organizational Buying:
A Synthesis of Research Results,” Journal of Business & Industrial Marketing 11 (3/4, 1996): pp. 68–79.
52 Elizabeth J. Wilson, Gary L. Lilien, and David T. Wilson, “Developing and Testing a Contingency Paradigm of
Group Choice in Organizational Buying,” Journal of Marketing Research 28 (November 1991): pp. 452–466.
53 Sheth, “A Model of Industrial Buyer Behavior,” p. 54; see also W. E. Patton III, Charles P. Puto, and Ronald H. King,
“Which Buying Decisions Are Made by Individuals and Not by Groups?” Industrial Marketing Management 15 (May
1986): pp. 129–138.
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B2B TOP PERFORMERS
Delivering Customer Solutions
If you review the performance of salespersons at
most business marketing firms, large or small,
you will observe some who consistently perform
at a level that sets them apart from their peers. A
recent study explores how exceptional performers
acquire and use information to manage customer
relationships. In-depth interviews were conducted
with 60 salespersons at a Fortune 500 firm: 20
high-performing, 20 average-performing, and 20
low-performing salespersons.
Sharp differences emerged when the salespersons
were asked to categorize their customers into
groups based on characteristics they found most
useful in managing customer relationships. Here
high performers emphasize customer goals, whereas
low performers emphasize customer demographics
(for example, large versus small firms). In turn,
the study reveals that high performers develop a
more extensive network of relationships within
the customer organization compared with their
colleagues. Importantly, high performers are better
able to establish and maintain profitable customer
relationships because they align their organization’s
special capabilities to the customer’s primary goals.
In other words, top-performing sales specialists
provide a solution that advances the performance
of the customer organization.
SOURCE: Gabriel R. Gonzalez, Beth A. Walker, Dimitrios
Kapelianis, and Michael D. Hutt, “The Role of Information
Acquisition and Knowledge Use in Managing Customer
Relationships,” working paper, Arizona State University, Tempe,
Ariz., 2008.
In confronting “risky” purchase decisions, how do organizational buyers behave?
As the risk associated with an organizational purchase decision increases, the following occur54:
• The buying center becomes larger and comprises members with high levels of
organizational status and authority.
• The information search is active and a wide variety of information sources are
consulted. As the decision process unfolds, personal information sources (for example, discussions with managers at other organizations that have made similar
purchases) become more important.
• Buying center participants invest greater effort and deliberate more carefully
throughout the purchase process.
• Sellers who have a proven track record with the firm are favored—the choice of
a familiar supplier helps reduce perceived risk.
Rather than price, product quality and after-sale service are typically
most important to organizational buyers when they confront risky decisions.
When introducing new products, entering new markets, or approaching new
customers, the marketing strategist should evaluate the effect of alternative strategies on
perceived risk.
54 Johnston and Lewin, “Organizational Buying Behavior: Toward an Integrative Framework,” pp. 8–10. See also Puto,
Patton, and King, “Risk Handling Strategies in Industrial Vendor Selection Decisions,” pp. 89–95.
Chapter 3
FIGURE 3.4
Organizational Buying Behavior
85
MAJOR ELEMENTS OF ORGANIZATIONAL BUYING BEHAVIOR
Evoked Set of
Alternatives
Individual Responsibilities
Comprising the Buying Center
Environmental
Constraints
(Physical,
Technological,
Economic,
Social)
Organizational
Requirements
(Technical,
Financial)
Sources
of
Information
Evaluation
Criteria
Interaction
Structure
Feasible Set
of Alternatives
Formation of
Individual
Preferences
Formation of
Organizational
Preferences
Organizational
Choice
SOURCE: Jean-Marie Choffray and Gary L. Lilien, “Assessing Response to Industrial Marketing Strategy,” Journal of
Marketing 42 (April 1978): p. 22. Reprinted by permission of the American Marketing Association.
The Organizational Buying
Process: Major Elements
The behavior of organizational buyers is influenced by environmental, organizational,
group, and individual factors. Each of these spheres of influence has been discussed in an
organizational buying context, with particular attention to how the industrial marketer
should interpret these forces and, more important, factor them directly into marketing
strategy planning. A model of the organizational buying process is presented in Figure 3.4,
which serves to reinforce and integrate the key areas discussed so far in this chapter.55
55 Choffray and Lilien, “Assessing the Response to Industrial Marketing Strategy,” pp. 20–31. Other models of organizational buying behavior include Webster and Wind, Organizational Buying Behavior, pp. 28–37; and Sheth, “A Model of
Industrial Buyer Behavior,” pp. 50–56. For a comprehensive review, see Sheth, “Organizational Buying Behavior,”
pp. 7–24; and Johnston and Lewin, “Organizational Buying Behavior,” pp. 1–15.
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This framework focuses on the relationship between an organization’s buying
center and the three major stages in the individual purchase decision process:
1. the screening of alternatives that do not meet organizational requirements;
2. the formation of decision participants’ preferences;
3. the formation of organizational preferences.
Observe that individual members of the buying center use various evaluative criteria and are exposed to various sources of information, which influence the industrial
brands included in the buyer’s evoked set of alternatives—the alternative brands
a buyer calls to mind when a need arises and that represent only a few of the many
brands available.56
Environmental constraints and organizational requirements influence the
procurement process by limiting the number of product alternatives that satisfy
organizational needs. For example, capital equipment alternatives that exceed a
particular cost (initial or operating) may be eliminated from further consideration.
The remaining brands become the feasible set of alternatives for the organization, from which individual preferences are defined. The interaction structure
of the members of the buying center, who have differing criteria and responsibilities, leads to the formation of organizational preferences and ultimately to organizational choice.
Understanding the organizational buying process enables the marketer to play an
active rather than a passive role in stimulating market response. The marketer who
identifies organizational screening requirements and the salient evaluative criteria of
individual buying center members can make more informed product design, pricing,
and promotional decisions.
Summary
Knowledge of the process that organizational buyers follow in making purchasing
decisions is fundamental to responsive marketing strategy. As a buying organization
moves from the problem-recognition phase, in which a procurement need is defined,
to later phases, in which suppliers are screened and ultimately chosen, the marketer
can play an active role. In fact, the astute marketer often triggers initial awareness of
the problem and helps the organization effectively solve that problem. Incremental
decisions made throughout the buying process narrow the field of acceptable suppliers and dramatically influence the ultimate outcome.
The nature of the buying process depends on the organization’s level of experience with similar procurement problems. It is thus crucial to know how the organization defines the buying situation: as a new task, a modified rebuy, or a straight rebuy.
Each buying situation requires a unique problem-solving approach, involves unique
buying influentials, and demands a unique marketing response.
56 Howard and Sheth, The Theory of Buyer Behavior, p. 26; see also Ronald P. LeBlanc, “Environmental Impact on
Purchase Decision Structure,” Journal of Purchasing and Materials Management 17 (Spring 1981): pp. 30–36; and Lowell
E. Crow, Richard W. Olshavsky, and John O. Summers, “Industrial Buyers’ Choice Strategies: A Protocol Analysis,”
Journal of Marketing Research 17 (February 1980): pp. 34–44.
Chapter 3
Organizational Buying Behavior
87
Myriad forces—environmental, organizational, group, and individual—influence organizational buying behavior. First, environmental forces define the boundaries within
which industrial buyers and sellers interact, such as general business conditions or the
rate of technological change. Second, organizational forces dictate the link between buying activities and the strategic priorities of the firm and the position that the purchasing
function occupies in the organizational structure. Third, the relevant unit of analysis for
the marketing strategist is the buying center. The composition of this group evolves during the buying process, varies from firm to firm, and changes from one purchasing situation to another. Fourth, the marketer must ultimately concentrate attention on individual
members of the buying center. Each brings a particular set of experiences and a unique
personal and organizational frame of reference to the buying decision. The marketer who
is sensitive to individual differences is best equipped to develop responsive marketing
communications that the organizational buyer will remember.
Unraveling the complex forces that encircle the organizational buying process is
indeed difficult. This chapter offers a framework that enables the marketing manager
to begin this task by asking the right questions. The answers provide the basis for effective and efficient business marketing strategy.
Discussion Questions
1. Ford revamped the way it purchases operating resources such as office,
computer, and maintenance supplies. Instead of having employees
fill out purchase orders that must be cleared by the boss days later,
employees simply log on to an Internet system. They browse through
the electronics catalogs of manufacturers, order from a preapproved
group of suppliers, and get purchase approval in minutes. What new
challenges and opportunities does the e-procurement system present for
business marketers who serve Ford?
2. Jim Jackson, an industrial salesperson for Pittsburgh Machine Tool, will
call on two accounts this afternoon. The first will be a buying organization
Jim has been servicing for the past 3 years. The second call, however,
poses more of a challenge. This buying organization has been dealing with
a prime competitor of Pittsburgh Machine Tool for 5 years. Jim, who has
good rapport with the purchasing and engineering departments, feels that
the time may be right to penetrate this account. Recently, Jim learned
that the purchasing manager was extremely unhappy with the existing
supplier’s poor delivery service. Define the buying situations confronting
Jim and outline the appropriate strategy he should follow in each case.
3. Karen Weber, the purchasing agent for Smith Manufacturing, views the
purchase of widgets as a routine buying decision. What factors might
lead her to alter this position? More important, what factors determine
whether Karen considers a particular supplier, such as Albany Widget?
4. Harley-Davidson, the U.S. motorcycle producer, recently purchased some
sophisticated manufacturing equipment to enhance its position in a very
competitive market. First, what environmental forces might have been
important in spawning this capital investment? Second, which functional
units were likely to have been represented in the buying center?
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5. Brunswick Corporation centralizes its procurement decisions at the
headquarters level. Discuss how it would approach purchasing differently
than a competitor that decentralizes purchasing across various plant
locations.
6. The Kraus Toy Company recently decided to develop a new electronic
game. Can an electrical parts supplier predict the likely composition
of the buying center at Kraus Toy? What steps could an industrial
salesperson take to influence the composition of the buying center?
7. Explain how the composition of the buying center evolves during the
purchasing process and how it varies from one firm to another, as well as
from one purchasing situation to another. What steps can a salesperson
take to identify the influential members of the buying center?
8. Carol Brooks, purchasing manager for Apex Manufacturing Co., read
the Wall Street Journal this morning and carefully studied, clipped, and
saved a full-page ad by the Allen-Bradley Company. Ralph Thornton,
the production manager at Apex, read several articles from the same
paper but could not recall seeing this particular ad or, for that matter,
any ads. How could this occur?
9. Organizations purchase millions of notebook computers each year.
Identify several evaluative criteria that purchasing managers might use in
choosing a particular brand. In your view, which criteria would be most
decisive in the buying decision?
10. The levels of risk associated with organizational purchases range from
low to high. Discuss how the buying process for a risky purchase differs
from the process for a routine purchase.
Internet Exercises
1. Dell, Inc., has been wildly successful in selling its products over the Internet
to customers of all types, including every category of customers in the
business market: commercial enterprises, institutions, and government.
Assume your university library is planning to purchase 25 new desktop
computers. Go to http://www.dell.com and to the Dell Online Store for
Higher Education and:
a. identify the price and product dimensions of two desktop systems
that might meet your university’s needs, and
b. provide a critique of the Web site and consider how well it provided
access to the information that a potential buyer might want.
CASE
The Tablet PC for Nurses: A Mobile Clinical Assistant57
Intel Corporation and Motion Computing, Inc., are demonstrating the result of a
joint effort to increase the productivity of nurses—the Motion C5 Mobile Clinical
Assistant—a tablet-style personal computer designed for use in hospitals and clinics.
The idea for the product emerged from ethnographic studies that Intel conducted
in the health-care setting. Here researchers observed the round-the-clock flow of activities in a hospital and meticulously recorded the key tasks performed by the nurses
and professional staff, tracing their every movement. The C5 benefited from the rich
insights uncovered by Intel’s study as well as from similar research that Motion Computing had completed in prior years. The companies believe that the device will help
nurses handle chores such as remotely calling up medical records and doctors’ orders,
charting vital signs, and exchanging information with other professionals.
The Motion C5, which is priced at $2,199, provides a sure-grip handle, a sealed
case for easy cleaning and disinfecting, a lightweight design for portability, a 10-inch
screen for easily viewing clinical information, rugged construction, and a pen and stylus input so clinicians can enter text and navigate the software without being tied to
a keyboard. The innovative device also incorporates such features as integrated bar
code and radio frequency identification (RFID) readers for patient identification and/
or electronic medication administration, an integrated camera, and built-in wireless
connectivity.
When the Motion C5 was released in 2007, about 16 percent of U.S. hospitals
were using tablet PCs, and 24 percent had smaller handheld computers. Some hospitals prefer what they call COWs—computers on wheels—that can be rolled into
patients’ rooms.
One of the first U.S. adopters of the Motion C5 was Island Hospital, located in
Anacortes, Washington. Rick Kiser, assistant director of information systems for Island Hospital, was centrally involved in the buying decision. Though Island’s buying
team had initially recommended adding COWs for every patient room, the nursing
staff had concerns about COWs’ limitations. Kiser noted: “The single biggest issue
was the COWs are impossible to clean. The sanitary aspect was a nightmare.”
Holly Hoskinson, RN and clinical infomatics specialist, also noted the COWs
were difficult to maneuver from room to room. “We tried a variety of cart styles but
they are all still big and heavy.” Another Island RN, Chris Storm, agreed: “We wanted
a device in each room and based on our budget we would have to move COWs from
room to room. That option was not acceptable.”
While other brands of PC tablets were evaluated, the buying team determined
that the Motion C5 best met Island’s needs. Concerning the decision, Rick Kiser observed: “The thing that cinched it was that this tablet was designed for the medical
environment. They are drop resistant and easy to clean and other tablets didn’t offer
anything near what we needed.”
57 “The Three M’s: Mobility, MEDITECH, and Motion C5,” White paper, February 2008, Motion Computing, Inc.,
accessed at http://www.motioncomputing.com on June 5, 2008; and Don Clark, “Intel, Motion Develop Tablet PC for
Nurses,” Wall Street Journal, February 21, 2007, p. D7.
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Discussion Questions
1. Suggest strategies that Motion Computing might follow to speed the adoption
of the Motion C5 device by hospitals.
2. Potential members of the buying center for a tablet PC purchasing decision might
include hospital administrators, nurses, doctors, information technology (IT)
specialists, and purchasing managers. Describe how the buying criteria emphasized
by hospital administrators or purchasing managers might differ from those
embraced by IT specialists or members of the medical staff.
CHAPTER
4
Customer Relationship Management
Strategies for Business Markets
A well-developed ability to create and sustain successful working relationships with
customers gives business marketing firms a significant competitive advantage. After
reading this chapter, you will understand:
1. the patterns of buyer-seller relationships in the business market.
2. the factors that influence the profitability of individual customers.
3. a procedure for designing effective customer relationship management
strategies.
4. the distinctive capabilities of firms that excel at customer relationship
management.
5. the critical determinants of success in managing strategic alliances.
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Every night, John Chambers, CEO of Cisco Systems, receives a personal update on
15 to 20 major customers via voice-mail. “E-mail would be more efficient but I want
to hear the emotion, I want to hear the frustration; I want to hear the caller’s level of
comfort with the strategy we’re employing,” says Chambers. “I can’t get that through
e-mail.”1 In addition to giving day-to-day attention to monitoring relationships with
the firm’s most valuable customers, John Chambers has personally taken the lead in
forging important strategic alliances.2
Leading business marketing firms like Cisco succeed by providing superior value
to customers, by satisfying the special needs of even the most demanding customers, and by understanding the factors that influence individual customer profitability.
Compared with the consumer packaged-goods sector, customer profitability is particularly important in business markets because marketing managers allocate a greater
proportion of their marketing resources at the individual customer level.3 The ability of an organization to create and maintain profitable relationships with these most
valuable customers is a durable basis of competitive advantage.
A business marketer who wishes to find a place on Cisco’s preferred supplier list
must be prepared to help the firm provide more value to its demanding customers. To
this end, the marketer must provide exceptional performance in quality, delivery, and,
over time, cost competitiveness. The supplier must also understand how Cisco measures value and how its product and service offering can meet or surpass these value
expectations. Building and maintaining lasting customer relationships requires careful
attention to detail, meeting promises, and swiftly responding to new requirements.
The new era of business marketing is built upon effective relationship management.4 Many business marketing firms create what might be called a collaborative
advantage by demonstrating special skills in managing relationships with key customers or by jointly developing innovative strategies with alliance partners.5 These firms
have learned how to be good partners, and these superior relationship skills are a valuable asset. This chapter explores the types of relationships that characterize the business
market. What market and situational factors are associated with different types of buyerseller relationships? What factors influence customer profitability? What strategies can
business marketers employ to build profitable relationships with customers? What are
the distinctive capabilities of firms that excel at customer relationship management and
consistently deliver superior financial performance in managing strategic alliances?
Relationship Marketing6
Relationship marketing centers on all activities directed toward establishing,
developing, and maintaining successful exchanges with customers and other constituents.7 Nurturing and managing customer relationships have emerged as an important
1 Frederick E. Reichheld, “Lead for Loyalty,” Harvard Business Review 79 (July–August 2001): p. 82.
2 “Cisco: Perspective on Strategic Alliances: An Interview with Greg Fox, Director of Marketing for Cisco’s Strategic
Alliances,” Leading Edge Newsletter, Volume 1, No. 5 (May 2006), accessed at http://www.amanet.org on July 5, 2008.
3 Douglas Bowman and Das Narayandas, “Linking Customer Management Effort to Customer Profitability in Business
Markets,” Journal of Marketing Research 41 (November 2004): pp. 433–447.
4 For a comprehensive review, see Robert W. Palmatier, Relationship Marketing (Boston: Marketing Science Institute, 2008).
5 Rosabeth Moss Kanter, “Collaborative Advantage,” Harvard Business Review 72 (July–August 1994): pp. 96–108.
6 This section is based on George S. Day, “Managing Market Relationships,” Journal of the Academy of Marketing Science
28 (Winter 2000): pp. 24–30, except when others are cited.
7 Robert M. Morgan and Shelby D. Hunt, “The Commitment-Trust Theory of Relationship Marketing,” Journal of
Marketing 58 (July 1994): pp. 20–38.
Chapter 4
FIGURE 4.1
Customer Relationship Management Strategies for Business Markets
93
THE RELATIONSHIP SPECTRUM
Transactional
Exchanges
Anonymous transactions/
Automated purchasing
Value-Added
Exchanges
Collaborative
Exchanges
Complete collaboration and
integration of supplier with
customer or channel partner
SOURCE: Figure from “Managing Market Relationships” by George S. Day from Journal of Academy of Marketing
Science 28 (Winter 2000): p. 25. Copyright © 2000. Reprinted by permission of Springer.
strategic priority in most firms. Why? First, loyal customers are far more profitable
than customers who are price sensitive and perceive few differences among alternative offerings. Second, a firm that is successful in developing strong relationships
with customers secures important and durable advantages that are hard for competitors to understand, copy, or displace.
Types of Relationships
A business marketer may begin a relationship with GE as a supplier (one of many),
move to a preferred supplier status (one of a few), and ultimately enter a collaborative
relationship with GE (sole source for particular items). Observe in Figure 4.1 that
buyer-seller relationships are positioned on a continuum, with transactional exchange
and collaborative exchange serving as the endpoints. Central to every relationship is
an exchange process where each side gives something in return for a payoff of greater
value. Transactional exchange centers on the timely exchange of basic products for
highly competitive market prices. George Day notes that such exchanges
include the kind of autonomous encounters a visitor to a city has with the taxi
or bus from the airport, as well as a series of ongoing transactions in a businessto-business market where the customer and supplier focus only on the timely
exchange of standard products at competitive prices.8
Moving across the continuum, relationships become closer or more collaborative. The open exchange of information is a characteristic of collaborative (close)
versus transactional (distant) exchange. Likewise, operational linkages reflect how
much the systems, procedures, and routines of the buying and selling firms have been
connected to facilitate operations.9 These relationship connectors are a feature of
a collaborative relationship. For example, such linkages provide the basis for order
replenishment or just-in-time deliveries that Honda receives each day from suppliers at its Marysville, Ohio, production facility. Collaborative exchange features very
close information, social, and operational linkages as well as mutual commitments
8 Day, “Managing Market Relationships,” p. 25.
9 Joseph P. Cannon and William D. Perreault, Jr., “Buyer-Seller Relationships in Business Markets,” Journal of Marketing
Research 36 (November 1999): pp. 439–460.
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made in expectation of long-run benefits. According to James Anderson and James
Narus, collaborative exchange involves
a process where a customer and supplier firm form strong and extensive social,
economic, service, and technical ties over time, with the intent of lowering
total costs and/or increasing value, thereby achieving mutual benefit.10
Value-Adding Exchanges
Between the two extremes on the relationship continuum are value-adding exchanges,
where the focus of the selling firm shifts from attracting customers to keeping customers. The marketer pursues this objective by developing a comprehensive understanding of a customer’s needs and changing requirements, tailoring the firm’s offerings to
those needs, and providing continuing incentives for customers to concentrate most
of their purchases with them. To illustrate, W.W. Grainger provides a customized
Web page for each of its premier corporate customers that individual employees in
the customer organization can use to track expenditures on maintenance and operating supplies against key performance benchmarks.
Nature of Relationships
Transactional exchange involves items like packaging materials or cleaning services
where competitive bidding is often employed to secure the best terms. Such exchanges
are purely contractual arrangements that involve little or no emotional commitment
to sustaining the relationship in the future. By contrast, customized, high-technology
products—like semiconductor test equipment—fit the collaborative exchange category. Whereas transactional exchange centers on negotiations and an arm’s-length
relationship, collaborative exchange emphasizes joint problem solving and multiple
linkages that integrate the processes of the two parties. Trust and commitment provide
the foundation for collaborative exchange.11 Relationship commitment involves a
partner’s belief that an ongoing relationship is so important that it deserves maximum
efforts to maintain it. In turn, trust exists when one party has confidence in a partner’s reliability and integrity. Recent research highlights the powerful role that contact personnel (for example, salespersons) assume in forging a long-term relationship.
“Individuals who build trust in each other will transfer this bond to the firm level.”12
Strategic Choices
Business marketers have some latitude in choosing where to participate along the
relationship continuum. However, limits are imposed by the characteristics of the
10 James C. Anderson and James A Narus, “Partnering as a Focused Market Strategy,” California Management Review
33 (Spring 1991): p. 96. See also Ven Srivam, Robert Krapfel, and Robert Spekman, “Antecedents to Buyer-Seller
Collaboration: An Analysis from the Buyer’s Perspective,” Journal of Business Research (December 1992): pp. 303–320.
11 Morgan and Hunt, “The Commitment-Trust Theory,” pp. 20–38. See also Patricia M. Doney and Joseph P. Cannon,
“An Examination of the Nature of Trust in Buyer-Seller Relationships,” Journal of Marketing 61 (April 1997): pp. 35–51.
12 Das Narayandas and V. Kasturi Rangan, “Building and Sustaining Buyer-Seller Relationships in Mature Industrial
Markets,” Journal of Marketing 68 (July 2004): p. 74; and Robert W. Palmatier, Lisa K. Scheer, and Jan-Benedict E. M.
Steenkamp, “Customer Loyalty to Whom? Managing the Benefits and Risks of Salesperson-Owned Loyalty,” Journal of
Marketing Research 44 (May 2007): pp. 185–199.
Chapter 4
Customer Relationship Management Strategies for Business Markets
95
B2B TOP PERFORMERS
Understanding the Customer’s Business—The Key to Success
To forge a collaborative relationship with a
customer, the business marketer requires a deep
understanding of the customer’s business, its key
competitors, and its goals and strategies. In turn,
a wealth of communication links are required
across the partnering organizations at all levels of
management. Salespersons not only work with the
purchasing staff but also have close ties to senior
executives. For example, for some of IBM’s Fortune
500 customers, account executives are direct
participants in the customer firm’s strategy planning
sessions. Here IBM adds value to the relationship
by providing specific recommendations concerning
how its products and services can be used to advance
the firm’s competitive advantage. As a relationship
with a large account grows and flourishes, a full-time
sales team is often created to serve the needs of that
customer. The team comprises sales, service, and
technical specialists who have extensive knowledge
of the customer’s industry. Some team members
have worked exclusively with a single customer
organization for years.
market and by the significance of the purchase to the buyer. A central challenge for
the marketer is to overcome the gravitational pull toward the transaction end of the
exchange spectrum. According to Day,
Rivals are continually working to attract the best accounts away; customer
requirements, expectations, and preferences keep changing, and the possibility of friction-free exploration of options in real time on the Web conspire to
raise the rate of customer defections.13
Managing Buyer-Seller Relationships
Buyers and sellers craft different types of relationships in response to market conditions and the characteristics of the purchase situation. To develop specific relationshipmarketing strategies for a particular customer, the business marketer must understand
that some customers elect a collaborative relationship, whereas others prefer a more
distant or transactional relationship. Figure 4.2 highlights the typical characteristics
of relationships at the endpoints of the buyer-seller relationship spectrum.
Transactional Exchange
Customers are more likely to prefer a transactional relationship when a competitive
supply market features many alternatives, the purchase decision is not complex, and
the supply market is stable. This profile fits some buyers of office supplies, commodity
chemicals, and shipping services. In turn, customers emphasize a transactional orientation when they view the purchase as less important to the organization’s objectives.
Such relationships are characterized by lower levels of information exchange and are
less likely to involve operational linkages between the buying and selling firms.
13 Day, “Managing Market Relationships,” p. 25.
96
Part II
Managing Relationships in Business Marketing
FIGURE 4.2
THE SPECTRUM OF BUYER-SELLER RELATIONSHIPS
Transactional
Exchange
Collaborative
Exchange
Availability of Alternatives
Many Alternatives
Few Alternatives
Supply Market Dynamism
Stable
Volatile
Importance of Purchase
Low
High
Complexity of Purchase
Low
High
Information Exchange
Low
High
Operational Linkages
Limited
Extensive
SOURCE: Adapted from Joseph P. Cannon and William D. Perreault Jr., “Buyer-Seller Relationships in Business Markets,”
Journal of Marketing Research 36 (November 1999): pp. 439–460.
Collaborative Exchange
Buying firms prefer a more collaborative relationship when alternatives are few, the
market is dynamic (for example, rapidly changing technology), and the complexity of
the purchase is high. In particular, buyers seek close relationships with suppliers when
they deem the purchase important and strategically significant. This behavior fits
some purchasers of manufacturing equipment, enterprise software, or critical component parts. Indeed, say Cannon and Perreault,
the closest partnerships . . . arise both when the purchase is important and
when there is a need—from the customer’s perspective—to overcome
procurement obstacles that result from fewer supply alternatives and more
purchase uncertainty.14
Moreover, the relationships that arise for important purchases are more likely to
involve operational linkages and high levels of information exchange. Switching costs
are especially important to collaborative customers.
Switching Costs
In considering possible changes from one selling firm to another, organizational buyers
consider two switching costs: investments and risk of exposure. First, organizational
buyers invest in their relationships with suppliers in many ways. As Barbara Bund
Jackson states:
They invest money; they invest in people, as in training employees to run new
equipment; they invest in lasting assets, such as equipment itself; and they
invest in changing basic business procedures like inventory handling. 15
14 Cannon and Perreault, “Buyer-Seller Relationships,” p. 453.
15 Barbara Bund Jackson, “Build Customer Relationships That Last,” Harvard Business Review 63 (November–December
1985): p. 125.
Chapter 4
Customer Relationship Management Strategies for Business Markets
97
Because of these past investments, buyers may hesitate to incur the disruptions and
switching costs that result when they select new suppliers.
Risk of exposure provides a second major category of switching costs. Attention
centers on the risks to buyers of making the wrong choice. Customers perceive more
risk when they purchase products important to their operations, when they buy from
less established suppliers, and when they buy technically complex products.
Strategy Guidelines
The business marketer manages a portfolio of relationships with customers—some
of these customers view the purchase as important and desire a close, tightly connected buyer-seller relationship; other customers assign a lower level of importance
to the purchase and prefer a looser relationship. Given the differing needs and orientations of customers, the business marketer’s first step is to determine which type
of relationship matches the purchasing situation and supply-market conditions for a
particular customer. Second, a strategy must be designed that is appropriate for each
strategy type.
Collaborative Customers Relationship-building strategies, targeted on strong and
lasting commitments, are especially appropriate for these customers. Business marketers can sensibly invest resources to secure commitments and directly assist customers with planning. Here sales and service personnel work not only with purchasing
managers but also with a wide array of managers on strategy and coordination issues.
Regular visits to the customer by executives and technical personnel can strengthen
the relationship. Operational linkages and information-sharing mechanisms should
be designed into the relationship to keep product and service offerings aligned with
customer needs. Given the long time horizon and switching costs, customers are concerned both with the marketers’ long-term capabilities and with their immediate performance. Because the customers perceive significant risk, they demand competence
and commitment from sellers and are easily frightened by even a hint of supplier
inadequacy.
Value Drivers in Collaborative Relationships A recent study examined this
intriguing question: What avenues of differentiation can suppliers of routinely purchased products use to create value in business-to-business relationships, thereby winning key supplier status?16 From Table 4.1, observe that the study uncovered three
sources of value creation—value creation through the core offering, within the sourcing process, and at the level of the customer’s operations. The associated relationship benefits and costs for each are listed. Consistent with the total cost of ownership
(Chapter 2) perspective that purchasing managers apply, costs as a value driver center
on the degree to which the supplier offers a lower price or adds value by taking costs
out of the sourcing process or the customer’s operations.
The results suggest that relationship benefits display a much stronger potential
for differentiation in key supplier relationships than cost considerations. Importantly,
service support and personal interaction were identified as the core differentiators,
16 Wolfgang Ulaga and Andreas Eggert, “Value-Based Differentiation in Business Relationships: Gaining and Sustaining
Key Supplier Status,” Journal of Marketing 70 (January 2006): pp. 119–136.
98
Part II
Managing Relationships in Business Marketing
TABLE 4.1
VALUE DRIVERS IN KEY SUPPLIER RELATIONSHIPS
Sources of Value Creation
Core offering
Sourcing process
Customer operations
Relationship Value Dimensions
Costs
Benefits
Product quality
Delivery performance
Service support
Personal interaction
Supplier know-how
Time to market
Direct costs
Acquisition costs
Operation costs
SOURCE: Wolfgang Ulaga and Andreas Eggert, “Value-Based Differentiation in Business Relationships: Gaining
and Sustaining Key Supplier Status,” Journal of Marketing 70 ( January 2006): p. 122. Copyright © 2001. Reprinted by
permission of Warren, Gorham, Lamont via Copyright Clearance Center.
followed by a supplier’s know-how and its ability to improve a customer’s time to
market. Product quality and delivery performance, along with cost savings associated with the acquisition process and from operations, display a moderate potential
to help a firm gain key supplier status. Finally, price displayed the weakest potential
for differentiation. The researchers, Wolfgang Ulaga and Andreas Eggert, conclude:
“Whereas cost factors serve as key criteria to get a supplier on the short list of those
vendors considered for a relationship, relationship benefits dominate when deciding
which supplier” should be awarded key supplier status.17
Transaction Customers These customers display less loyalty or commitment to
a particular supplier and can easily switch part or all of the purchases from one vendor to another. A business marketer who offers an immediate, attractive combination of product, price, technical support, and other benefits has a chance of winning
business from a transactional customer. The salesperson centers primary attention on
the purchasing staff and seldom has important ties to senior executives in the buying
organization. M. Bensaou argues that it is unwise for marketers to make specialized
investments in transactional relationships:
Firms that invest in building trust through frequent visits, guest engineers,
and cross-company teams when the product and market context calls for simple, impersonal control and data exchange mechanisms are overdesigning the
relationship. This path is not only costly but also risky, given the specialized
investments involved, in particular, the intangible ones (for example, people,
information, or knowledge).18
Rather than adopting the approach of “one design fits all,” the astute marketer
matches the strategy to the product and market conditions that surround a particular
customer relationship and understands the factors that influence profitability.
17 Ibid., p. 131.
18 M. Bensaou, “Portfolio of Buyer-Seller Relationships,” Sloan Management Review 40 (Summer 1999): p. 43.
Chapter 4
Customer Relationship Management Strategies for Business Markets
99
Measuring Customer Profitability19
To improve customer satisfaction and loyalty, many business-to-business firms have developed customized products and increased the specialized services they offer. Although
customers embrace such actions, they often lead to declining profits, especially when the
enhanced offerings are not accompanied by increases in prices or order volumes. For a
differentiation strategy to succeed, “the value created by the differentiation—measured
by higher margins and higher sales volumes—has to exceed the cost of creating and delivering customized features and services.”20 By understanding the drivers of customer
profitability, the business marketing manager can more effectively allocate marketing
resources and take action to convert unprofitable relationships into profitable ones.
Activity-Based Costing
Most studies of customer profitability yield a remarkable insight: “Only a minority of
a typical company’s customers is truly profitable.”21 Why? Many firms fail to examine
how the costs of specialized products and services vary among individual customers.
In other words, they focus on profitability at an aggregate level (for example, product
or territory), fail to assign operating expenses to customers, and misjudge the profitability of individual customers. To capture customer-specific costs, many firms have
adopted activity-based costing.
Activity-based costing (ABC) illuminates exactly what activities are associated
with serving a particular customer and how these activities are linked to revenues and
the consumption of resources.22 The ABC system and associated software link customer transaction data from customer relationship management (CRM) systems with
financial information. The ABC system provides marketing managers with a clear and
accurate picture of the gross margins and cost-to-serve components that yield individual customer profitability.
Unlocking Customer Profitability
By accurately tracing costs to individual customers, managers are better equipped
to diagnose problems and take appropriate action. For example, Kanthal, a heating
wire manufacturer, learned to its surprise that one of its largest and most coveted
accounts—General Electric’s Appliance Division—was also one of its most unprofitable customers.23 A customer order that normally would cost Kanthal $150 to process
cost more than $600 from GE because of frequent order changes, expedited deliveries, and scheduling adjustments. A senior manager at Kanthal suggested to GE that
the numerous change orders were costly not only to Kanthal but also to GE. After a
quick internal review, GE managers agreed, corrected internal inefficiencies, and then
19 This section, unless otherwise noted, draws on Robert S. Kaplan and V. G. Narayanan, “Measuring and Managing
Customer Profitability,” Journal of Cost Management 15 (5, September–October 2001): pp. 5–15.
20 Robert S. Kaplan, “Add a Customer Profitability Metric to Your Balanced Scorecard,” Balanced Scorecard Report,
July–August 2005 (Boston: Harvard Business School Publishing Corporation), p. 3.
21 Kaplan and Narayanan, “Measuring and Managing Customer Profitability,” p. 5.
22 Ibid., p. 7. See also Robert S. Kaplan and Steven R. Anderson, “Time-Driven Activity-Based Costing,” Harvard Business
Review 82 (November 2004): pp. 131–138.
23 Kaplan and Narayanan, p. 11.
100 Part II
Managing Relationships in Business Marketing
Text not available due to copyright restrictions
awarded Kanthal with the largest contract in the firm’s history. The contract incorporated a surcharge for any change GE made to an existing order and established a
minimum order size. By isolating the true cost of serving GE, Kanthal converted an
unprofitable relationship to a profitable one and provided further value by helping a
key customer reduce costs.
The Profitable Few
Once a firm implements an ABC approach and plots cumulative profitability against
customers, a striking portrait emerges that is often referred to as the whale curve
(Figure 4.3). Robert S. Kaplan, who is codeveloper of activity-based costing, and his
colleague, V. G. Narayanan, describe the pattern that many companies find:
Whereas cumulative sales usually follow the typical 20/80 rule (that is,
20 percent of the customers provide 80 percent of the sales), the whale curve
for cumulative profitability usually reveals that the most profitable 20 percent of
customers generate between 150 percent and 300 percent of total profits. The
middle 70 percent of customers break even and the least profitable 10 percent
of customers lose from 50 to 200 percent of total profits, leaving the company
with its 100 percent of total profits.24
24 Ibid., p. 7. See also Robert S. Kaplan and David P. Norton, The Execution Premium (Boston: Harvard Business Press,
2008), pp. 255–261.
Chapter 4
Customer Relationship Management Strategies for Business Markets
101
Text not available due to copyright restrictions
As a rule, large customers tend to be included among the most profitable (see
left side of Figure 4.3) or the least profitable (see right side of Figure 4.3)—they are
seldom in the middle. Interestingly, some of the firm’s largest customers often turn
out to be among the most unprofitable. A firm does not generate enough sales volume
with a small customer to incur large absolute losses. Only large buyers can be largeloss customers. In Figure 4.3, low-cost-to-serve customers appear on the profitable
side of the whale curve and high-cost-to-serve customers end up on the unprofitable
side unless they pay a premium price for the specialized support they require.
Managing High- and Low-Cost-to-Serve Customers
What causes some customers to be more expensive than others? Note from Table 4.2
that high-cost-to-serve customers, for example, desire customized products, frequently
change orders, and require a significant amount of presales and postsales support.
By contrast, low-cost-to-serve customers purchase standard products, place orders
and schedule deliveries on a predictable cycle, and require little or no presales or postsales support.
Look Inside First After reviewing the profitability of individual customers, the
business marketer can consider possible strategies to retain the most valuable customers and to transform unprofitable customers into profitable ones. However, managers should first examine their company’s own internal processes to ensure that it
can accommodate customer preferences for reduced order sizes or special services
at the lowest cost. For example, a large publisher of business directories reduced the
cost of serving its customer base by assigning key account managers to its largest customers (that is, the 4 percent of customers who accounted for 45 percent of its sales)
Managing Relationships in Business Marketing
CUSTOMER PROFITABILITY
FIGURE 4.4
High
Net Margin Realized
102 Part II
Passive
• Product is Crucial
• Good Supplier Match
Price Sensitive but
Few Special
Demands
Costly to Service,
but Pay Top
Dollar
its
Prof
es
Loss
Aggressive
• Leverage Their Buying
Power
• Low Price and Lots of
Customized Features
Low
Low
High
Cost-to-Serve
SOURCE: Reprinted by permission of Harvard Business Review. From “Manage Customers for Profits (Not Just Sales)”
by B. P. Shapiro et al., September–October 1987: p. 104. Copyright © 1987 by the Harvard Business School Publishing
Corporation; all rights reserved.
and serving the smallest customers over the Internet and by a telephone sales force.25
These actions not only cut costs dramatically but also gave each group of customers
what they had wanted all along: Large customers wanted a central point of contact
where they could secure services customized to their needs; small customers preferred minimal contact with a direct salesperson but wanted the assurance that they
could receive advice and support if required.
A Sharper Profit Lens Business marketing managers can view their customers
through the lens of a simple 2 3 2 diagram (Figure 4.4). The vertical axis shows the
net margin earned from sales to a particular customer. The net margin equals the
net price, after all discounts, minus manufacturing costs. The horizontal axis shows
the costs of serving the customer, including order-related costs plus the customerspecific marketing, technical, and administrative expenses.
Identifying Profitable Customers Observe from Figure 4.4 that profitable customers can take different forms. To illustrate, a customer like Honda of America would
be at the lower left corner of the diagram: demanding low prices, so net margins are
low, but also working with its suppliers to streamline activities so that the cost-toserve is also low. High-cost-to-serve customers who occupy the upper right corner of
Figure 4.4 can also be profitable if the net margins earned on sales to them more than
compensate the company for the cost of the resources used in serving them.
A company is indeed fortunate if several of its customers occupy the upper lefthand quadrant of the diagram: high margins and low cost-to-serve. Because these
25 George S. Day, “Creating a Superior Customer-Relating Capability,” MIT Sloan Management Review 44 (Spring 2003):
pp. 77–82.
Chapter 4
Customer Relationship Management Strategies for Business Markets
103
customers represent a valuable asset, marketing managers should forge close relationships with them, anticipate their changing needs, and have protective measures (for
example, special services) in place in case competitors attempt to win them away.
Managing Unprofitable Customers26
The most challenging set of customers for marketing managers is found in the lower
right-hand corner of Figure 4.4: low margins and high cost-to-serve. First, the marketing manager should explore possible ways to reduce the cost of activities associated
with serving these customers. For example, perhaps postsales support could be shifted
to the Internet. Second, the manager should direct attention to the customer actions
that contribute to higher selling costs. To illustrate, the high cost-to-serve may be
caused by the customer’s unpredictable ordering patterns or by the large demands it
places on technical and sales personnel. By detailing the costs of these activities and
openly sharing this information with the customer, the business marketing manager
can encourage the customer to work with the company more efficiently. From the
earlier example, recall that Kanthal used this approach not only to restore profitability
but also to help one of its largest customers, General Electric’s Appliance Division,
refine its internal processes and reduce its costs.
Firing Customers
By improving processes and refining pricing strategies, business marketing managers can transform many, but not all, customers from unprofitable to profitable.
What should we do with those unprofi table customers that remain in the highcost-to-serve quadrant of Figure 4.4? To answer this question, we have to dig
deeper into the customer relationship and assess the other benefi ts that certain
customers may provide. Some customers are new and the initial investment to attract them will ultimately be repaid in higher sales volume and profitability. Other
customers provide an opportunity for learning. For example, some firms that serve
Toyota or Honda incurred initial losses in serving these demanding customers but
secured insights into management processes and technology they could effectively
apply to all their customers.
Suppose, however, that a customer is unprofitable, not new, and offers little
or no opportunity for learning. Furthermore, suppose that the customer resists
all attempts to convert the unprofitable relationship into a profitable one. Under
these conditions, Robert S. Kaplan and Robin Cooper observe that we might consider firing them, but a more subtle approach will do: “We can, perhaps, let the
customer fire itself by refusing to grant discounts and reducing or eliminating marketing and technical support.”27 Customer divestment is a viable strategic option,
but one that must be exercised sparingly and only after other options have been
thoroughly examined.28
26 This section is based on Robert S. Kaplan and Robin Cooper, Cost and Effect: Using Integrated Cost Systems to Drive Profitability and Performance (Boston: Harvard Business School Press, 1998), pp. 193–201.
27 Ibid., p. 200.
28 Vikas Mittal, Matthew Sarkees, and Feisal Murshed, “The Right Way to Manage Unprofitable Customers,” Harvard
Business Review 86 (April 2008): pp. 95–102.
104 Part II
Managing Relationships in Business Marketing
Customer Relationship Management
Customer retention has always been crucial to success in the business market, and
it now provides the centerpiece of strategy discussions as firms embrace customer
relationship management. Customer relationship management (CRM) is a crossfunctional process for achieving
• a continuing dialogue with customers
• across all their contact and access points, with
• personalized treatment of the most valuable customers,
• to ensure customer retention and the effectiveness of marketing initiatives.29
To meet these challenging requirements, business marketing firms, large and
small, are making substantial investments in CRM systems—enterprise software applications that integrate sales, marketing, and customer service information. To improve service and retain customers, CRM systems synthesize information from all of a
company’s contact points or “touch points”—including e-mail, call centers, sales and
service representatives—to support later customer interactions and to inform market
forecasts, product design, and supply chain management.30 Salespersons, call center
personnel, Web managers, resellers, and customer service representatives all have the
same real-time information on each customer.
For an investment in CRM software to yield positive returns, a firm needs a customer strategy. Strategy experts contend that many CRM initiatives fail because executives mistake CRM software for a marketing strategy. Darrell Rigby and his colleagues
contend: “It isn’t. CRM is the bundling of customer strategy and processes, supported
by relevant software, for the purpose of improving customer loyalty and, eventually,
corporate profitability.”31 CRM software can help, but only after a customer strategy
has been designed and executed. To develop responsive and profitable customer strategies, special attention must be given to five areas: (1) acquiring the right customers,
(2) crafting the right value proposition, (3) instituting the best processes, (4) motivating employees, and (5) learning to retain customers (Table 4.3). Observe how CRM
technology from leading producers such as Oracle Corporation and Siebel Systems can
be used to capture critical customer data, transform it into valuable information, and
distribute it throughout the organization to support the strategy process from customer
acquisition to customer retention. Thus, a well-designed and executed customer strategy, supported by a CRM system, provides the financial payoff.
Acquiring the Right Customers
Customer relationship management directs attention to two critical assets of the business-to-business firm: its stock of current and potential customer relationships and
its collective knowledge of how to select, initiate, develop, and maintain profitable
29 George S. Day, “Capabilities for Forging Customer Relationships,” Working Paper, Report No. 00-118, Marketing
Science Institute, Cambridge, MA, 2000, p. 4.
30 Larry Yu, “Successful Customer-Relationship Management,” MIT Sloan Management Review 42 (Summer 2001): p. 18.
31 Darrell K. Rigby, Frederick F. Reichheld, and Phil Schefter, “Avoid the Four Perils of CRM,” Harvard Business Review
80 ( January–February 2002): p. 102.
Chapter 4
Customer Relationship Management Strategies for Business Markets
105
CREATING A CUSTOMER RELATIONSHIP MANAGEMENT STRATEGY
TABLE 4.3
CRM Priorities
Acquiring the
Right Customers
Crafting the Right
Value Proposition
Instituting the
Best Processes
Motivating
Employees
Learning to Retain
Customers
• Identify the
tools your
employees
need to foster
customer
relationships.
• Earn employee
loyalty by
investing in
training and
development
and constructing
appropriate
career paths for
employees.
• Understand
why customers
defect and how
to win them
back.
• Identify the
strategies your
competitors are
using to win
your high-value
customers.
Critical Tasks
• Determine the
products or
services your
customers need
today and will
need tomorrow.
• Assess the
products
or services
that your
competitors
offer today and
tomorrow.
• Identify new
products or
services that
you should be
offering.
• Identify your
most valuable
customers.
• Calculate your
share of their
purchases
(wallet) for
your goods and
services.
• Research the
best way to
deliver your
products or
services to
customers.
• Determine
the service
capabilities
that must be
developed and
the technology
investments
that are
required to
implement
customer
strategy.
CRM Technology Can Help
• Analyze
customer
revenue and
cost data to
identify current
and future
high-value
customers.
• Target
marketing
communications
to high-value
customers.
• Capture
relevant
product
and service
behavior data
from customer
transactions.
• Create new
distribution
channels.
• Develop new
pricing models.
• Process
transactions
faster.
• Provide better
information
to customer
contact
employees.
• Manage
logistics and the
supply chain
more efficiently.
• Align employee
incentives and
performance
measures.
• Distribute
customer
knowledge
to employees
throughout the
organization.
• Track customer
defection and
retention levels.
• Track customer
service
satisfaction
levels.
SOURCE: Adapted from Darrell K. Rigby, Frederick F. Reichheld, and Phil Schefter, “Avoid the Four Perils of CRM,” Harvard Business
Review 80 ( January–February 2002): p. 106.
relationships with these customers.32 Customer portfolio management, then, is the
process of creating value across a firm’s customer relationships—from transactional
to collaborative—with an emphasis on balancing the customer’s desired level of relationship against the profitability of doing so.33
32 Ruth N. Bolton, Katherine N. Lemon, and Peter Verhoof, “Expanding Business-to-Business Customer Relationships,”
Journal of Marketing 72 (January 2008): pp. 46–64.
33 Michael D. Johnson and Fred Selnes, “Diversifying Your Customer Portfolio,” MIT Sloan Management Review 46
(Spring 2005): pp. 11–14.
106 Part II
Managing Relationships in Business Marketing
INSIDE BUSINESS MARKETING
Diversify a Customer Portfolio Too!
For an investor, modern portfolio theory
demonstrates that optimal performance, for
a given level of risk, can best be achieved by
building a diversified mix of investment assets that
includes the stocks of both large and small firms,
representing both U.S. and foreign companies.
In building a customer portfolio, similar benefits
can be realized by viewing customers as assets
and diversifying across categories of customers.
For example, after the technology bubble, many
information technology (IT) companies, like IBM
and Microsoft, were surprised to observe that
small and medium-sized businesses (SMB) fueled
the recovery in IT spending. Why? Most of the
SMB customers did not overindulge in massive
hardware and software upgrades to the same
extreme extent during the bubble as their largeenterprise counterparts did. So, SMB customers
were the first to return and aggressively buy IT
products and services. Because Dell, Microsoft,
and IBM each have a customer portfolio that
includes a strong representation of SMB
customers, these firms enjoyed an edge over rivals
such as Hewlett-Packard and Sun Microsystems
that were less focused on this customer group
(that is, asset category) and were “caught waiting”
for large-enterprise customers to return.
SOURCE: Mark Veverka, “Little Guys Lead IT Spending
Recovery,” Barron’s, October 20, 2003, p. 73.
Account selection requires a clear understanding of customer needs, a tight grasp
on the costs of serving different groups of customers, and an accurate forecast of
potential profit opportunities. The choice of potential accounts to target is facilitated
by an understanding of how different customers define value. Value, as defined by
James Anderson and James Narus, refers to “the economic, technical, service, and social benefits received by a customer firm in exchange for the price paid for a product
offering.”34 By gauging the value of their offerings to different groups of customers,
business marketers are better equipped to target accounts and to determine how to
provide enhanced value to particular customers.
The account selection process should also consider profit potential. Because the
product is critical to their operations, some customers place a high value on supporting services (for example, technical advice and training) and are willing to pay
a premium price for them. Other customers are most costly to serve, do not value
service support, and are extremely price sensitive. Because customers have different
needs and represent different levels of current and potential opportunities, a marketer
should divide its customers into groups. The marketer wishes to develop a broader
and deeper relationship with the most profitable ones and assign a low priority to the
least profitable ones.35 Frank Cespedes asserts that
account selection, therefore, must be explicit about which demands the seller
can meet and leverage in dealings with other customers. Otherwise, the seller
34 Anderson and Narus, p. 98. See also Ajay Menon, Christian Homburg, and Nikolas Beutin, “Understanding Customer
Value in Business-to-Business Relationships,” Journal of Business-to-Business Marketing 12 (2, 2005): pp. 1–33; and Ulaga
and Eggert, “Value-Based Differentiation,” pp. 119–136.
35 Frederick F. Reichheld, “Lead for Loyalty,” Harvard Business Review 79 (July–August 2001): pp. 76–84.
Chapter 4
Customer Relationship Management Strategies for Business Markets
107
risks overserving unprofitable accounts and wasting resources that might
be allocated to other customer groups.36
Crafting the Right Value Proposition
A value proposition represents the products, services, ideas, and solutions that a business
marketer offers to advance the performance goals of the customer organization. Recall
from Chapter 1 that the customer value proposition must address this essential question:
How do the value elements (benefits) in a supplier’s offering compare to those of the nextbest alternative? A value proposition may include points of parity (certain value elements
are the same as the next-best option) and points of difference (the value elements that
make the supplier’s offering either superior or inferior to the next-best alternative). For
example, a supplier may offer improved technology (positive) at a higher price (negative)
and fail to convince customers that the new technology justifies the price increase.
Best-practice suppliers base their value proposition on the few elements
that matter most to target customers, demonstrate the value of this superior
performance, and communicate it in a way that conveys a sophisticated understanding of the customer’s business priorities.37
The Bandwidth of Strategies To develop customer-specific product offerings, the
business marketer should next examine the nature of buyer-seller relationships in the
industry. The strategies competing firms in an industry pursue fall into a range referred to as the industry bandwidth of working relationships.38 Business marketers
either attempt to span the bandwidth with a portfolio of relationship-marketing strategies or concentrate on a single strategy, thereby having a narrower range of relationships than the industry bandwidth.
Observe in Figure 4.5 how two different industries (medical equipment and hospital supplies) are positioned on the relationship continuum. Because the underlying
technology is complex and dynamic, collaborative relations characterize the medical
equipment industry. Here, a range of services—technical support, installation, professional training, and maintenance agreements—can augment the core product. By contrast, collaborative relations in the hospital supply industry tend to be more focused and
center on helping health-care organizations meet their operational needs (for example,
efficient ordering processes and timely delivery).
By diagnosing the spectrum of relationship strategies competitors in an industry
follow, a business marketer can tailor strategies that more closely respond both to
customers who desire a collaborative emphasis and to those who seek a transaction
emphasis. The strategy involves flaring out from the industry bandwidth in the collaborative as well as in the transactional direction (see Figure 4.5b).
Flaring Out by Unbundling An unbundling strategy can reach customers who desire a greater transaction emphasis. Here, related services are unbundled to yield the
36 Frank V. Cespedes, Concurrent Marketing: Integrating Product, Sales, and Service (Boston: Harvard Business School Press,
1995), p. 193. See also Don Peppers, Martha Rogers, and Bob Dorf, “Is Your Company Ready for One-to-One Marketing?” Harvard Business Review 77 (January–February 1999): pp. 151–160.
37 James C. Anderson, James A. Narus, and Wouter van Rossum, “Customer Value Propositions in Business Markets,”
Harvard Business Review 84 (March 2006): p. 93.
38 This discussion draws on Anderson and Narus, “Partnering as a Focused Market Strategy,” pp. 95–113.
108 Part II
Managing Relationships in Business Marketing
FIGURE 4.5
TRANSACTIONAL AND COLLABORATIVE WORKING RELATIONSHIPS
(a) Industry Relationship Bandwidths
Pure
Transactional
Exchange
Hospital Supplies
(e.g. surgical gloves, syringes)
Medical Equipment
(e.g. imaging systems)
Pure
Collaborative
Exchange
(b) "Flaring Out" from the Industry Bandwidth
Pure
Transactional
Exchange
Pure
Collaborative
Exchange
Hospital Supplies
a
b
c
d
SOURCE: Adapted from James C. Anderson and James A. Narus, “Partnering as a Focused Marketing Strategy,” California Management Review 33
(Spring 1991): p. 97.
core product (a in Figure 4.5b), which meets a customer’s basic price, quality, and
availability requirements. For each service that is unbundled, the price is lowered.
Augmented services, such as technical assistance, consulting, and just-in-time delivery,
are each offered, but in a menu fashion, on an incremental price basis. Importantly,
the price increments for the entire set of unbundled services should be greater than
the price premium sought for the collaborative offering. This reflects the efficiencies
of providing the complete bundle of services to a collaborative account. This pricing
policy is market oriented in that it allows customer firms to choose the product and
relationship offering that they perceive to provide the greatest value.
Flaring Out with Augmentation At the other extreme, the collaborative offering (d in Figure 4.5b) becomes the augmented product enriched with features the
customer values. Augmented features might include coordinated cost-reduction programs, technical assistance, delivery schedule guarantees, and cooperative advertising. Because collaborative efforts are designed to add value or reduce the costs of
exchange between partnering firms, a price premium should be received for the collaborative offering.
Allegiance Healthcare Corporation has developed ways to improve hospital
supply ordering, delivery, and billing that provide enhanced value to the customer.39
39 Valarie A. Zeithaml, Roland T. Rust, and Katherine N. Lemon, “The Customer Pyramid: Creating and Serving
Profitable Customers,” California Management Review 43 (Summer 2001): p. 134.
Chapter 4
Customer Relationship Management Strategies for Business Markets
109
Instead of miscellaneous supplies arriving in boxes sorted at the convenience of
Allegiance’s needs, they arrive on “client-friendly” pallets customized to meet the
distribution needs of the individual hospital. Moreover, hospitals can secure a structural connection to Allegiance through its ValueLink ordering system for added
value and convenience.
Creating Flexible Service Offerings Business marketers can gain a competitive
edge by creating a portfolio of service offerings and then drawing on this portfolio to
provide customized solutions for groups of customers or even individual customers.40
First, an offering should be created that includes the bare-bones-minimum number
of services valued by all customers in a particular market segment. Microsoft refers
to these offerings as “naked solutions.” Second, optional services are created that add
value by reducing costs or improving the performance of a customer’s operations.
To meet the needs of particular customers, optional services can then be “custom
wrapped” with the core offering to create added value.
Instituting the Best Processes
The sales force assumes a central relationship-management role in the business market. Technical service and customer service personnel also assume implementation
roles that are important and visible in buying organizations. Successful relationship
strategies are shaped by an effective organization and deployment of the personal selling effort and close coordination with supporting units, such as logistics and technical
service. Some firms divide the sales organization into units that each serve a distinct
relationship category such as transactional accounts or partnership accounts. Through
a careful screening process, promising transaction accounts are periodically upgraded
to partnerships.
Best Practices at IBM41 In serving a particular customer, a number of IBM employees come into contact with the customer organization. To ensure consistent strategy execution, IBM identifies three customer-contact roles for each of its accounts,
specifies desired measurable actions for each role, and monitors the customer’s degree
of satisfaction with each role (Table 4.4). The IBM client representative assigned to
the customer is the relationship owner, but the account team may include other specialists who complete a project for the customer (project owner) or solve a particular customer problem ( problem resolution owner). Any IBM employee who works on
the account can secure timely information from the CRM system to identify recent
actions or issues to be addressed. Moreover, for each role, there is an in-process measure and a customer feedback measure.
Consider an IBM technical manager assigned responsibility for installing CRM
software for a large bank. As a project owner, this manager’s goal is to determine
40 James C. Anderson and James A. Narus, “Capturing the Value of Supplementary Services,” Harvard Business Review
73 ( January–February 1995): pp. 75–83. See also David Rickard, “The Joys of Bundling: Assessing the Benefits and
Risks,” The Boston Consulting Group, Inc., 2008, accessed at http://www.bcg.com on May 15, 2008.
41 This discussion is based on Larry Schiff, “How Customer Satisfaction Improvement Works to Fuel Full Business
Recovery at IBM,” Journal of Organizational Excellence 20 (Spring 2001): pp. 3–18.
110 Part II
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TABLE 4.4
ROLE-BASED STRATEGY EXECUTION AT IBM: MEASURED ACTIONS AND RESULTS
Role
Strategy Goal
Measured Actions
Relationship Owner
Improve Customer
Relationships
Project Owner
Exceed Customer
Expectations for Each
Transaction
Fix Customer Problems
Meet with customer twice
per year to identify
customer’s expectations
and set action plan
Collect conditions of
satisfaction, get customer
feedback
Solve in seven days
or meet action plan
Problem Resolution
Measured Results
(Customer)
IBM Customer Satisfaction
Survey Results
IBM Transaction Survey
Results
Customer Satisfaction
with Problem Resolution
SOURCE: Adapted from Larry Schiff, “How Customer Satisfaction Improvement Works to Fuel Business Recovery at IBM,” Journal
of Organizational Excellence (Spring 2001): pp. 12–14.
the customer’s conditions of satisfaction and then exceed those expectations. When
the work is completed, members of the customer organization are queried concerning their satisfaction and the project owner acts on the feedback to ensure that all
promises have been kept. Clearly, a sound complaint management process is essential.
Recent research found that if a complaint is ineffectively handled, the firm faces a
high risk of losing even those customers who had previously been very satisfied.42
Research suggests that the performance attributes that influence the customer
satisfaction of business buyers include:
• the responsiveness of the supplier in meeting the firm’s needs,
• product quality,
• a broad product line,
• delivery reliability,
• knowledgeable sales and service personnel.43
Motivating Employees
Dedicated employees are the cornerstone of a successful customer relationship strategy.
Frederick F. Reichheld notes:
Leaders who are dedicated to treating people right drive themselves to deliver
superior value, which allows them to attract and retain the best employees.
That’s partly because higher profits result from customer retention, but more
important, it’s because providing excellent service and value generates pride
and a sense of purpose among employees.44
42 Christian Homburg and Andreas Fürst, “How Organizational Complaint Handling Drives Customer Loyalty: An
Analysis of the Mechanistic and the Organic Approach,” Journal of Marketing 69 (July 2005): pp. 95–114.
43 Bowman and Narayandas, “Linking Customer Management Effort,” pp. 433–447.
44 Reichheld, “Lead for Loyalty,” p. 78.
Chapter 4
Customer Relationship Management Strategies for Business Markets
111
Employee loyalty is earned by investing heavily in training and development,
providing challenging career paths to facilitate professional development, and aligning
employee incentives to performance measures.45 For example, Square D, an Illinoisbased producer of electrical and industrial equipment, altered its performancemeasurement and incentive systems to fit the firm’s new customer strategy. Consistent
with the goal of attracting high-value customers, salesperson incentives are no longer
based on the number of units sold but on the number of customers acquired and on
profit margins.
Research clearly demonstrates the link between salespeople’s job satisfaction
and customer satisfaction in business markets. Christian Homburg and Ruth M.
Stock report that the relationship between salespeople’s job satisfaction is particularly strong when there is a high frequency of customer interaction, high intensity
of customer integration into the value-creating process, and high product or service
innovativeness.46
Learning to Retain Customers
Business marketers track customer loyalty and retention because the cost of serving a
long-standing customer is often far less than the cost of acquiring a new customer.47
Why? Established customers often buy more products and services from a trusted supplier and, as they do, the cost of serving them declines. The firm learns how to serve
them more efficiently and also spots opportunities for expanding the relationship. Thus,
the profit from that customer tends to increase over the life of the relationship. To that
end, a goal for IBM is to gain an increasing share of a customer’s total information technology expenditures (that is, share of wallet). Rather than merely attempting to improve
satisfaction ratings, IBM seeks to be recognized as providing superior value to its customers. Larry Schiff, an IBM strategist, notes: “If you delight your customers and are
perceived to provide the best value in your market, you’ll gain loyalty and market /wallet
share.”48 Although loyal customers are likely to be satisfied, all satisfied customers do
not remain loyal. Business marketers earn customer loyalty by providing superior value
that ensures high satisfaction and by nurturing trust and mutual commitments.
Pursuing Growth from Existing Customers Business marketers should identify
a well-defined set of existing customers who demonstrate growth potential and selectively pursue a greater share of their business. Based on the cost-to-serve and projected
profit margins, the question becomes: Which of our existing customers represent
the best growth prospects? In targeting individual customers, particular attention
should be given to: (1) estimating the current share of wallet the firm has attained;
(2) pursuing opportunities to increase that share; and (3) carefully projecting the
enhanced customer profitability that will result.49
45 Rigby, Reichheld, and Schefter, “Avoid the Perils of CRM,” p. 104.
46 Christian Homburg and Ruth M. Stock, “The Link Between Salespeople’s Job Satisfaction and Customer Satisfaction
in a Business-to-Business Context: A Dyadic Analysis,” Journal of the Academy of Marketing Science 32 (Spring 2004):
pp. 144–158; and Christian Homburg and Ruth M. Stock, “Exploring the Conditions Under Which Salesperson Work
Satisfaction Can Lead to Customer Satisfaction,” Psychology & Marketing 22 (5, 2005): pp. 393–420.
47 Reichheld, “Lead for Loyalty,” pp. 76–84.
48 Schiff, “How Customer Satisfaction Improvement Works to Fuel Full Business Recovery at IBM,” p. 8.
49 James C. Anderson and James A. Narus, “Selectively Pursuing More of Your Customer’s Business,” MIT Sloan
Management Review 44 (Spring 2003): pp. 42–49.
112 Part II
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Evaluating Relationships Some relationship-building efforts fail because the expectations of the parties do not mesh—for example, when the business marketer follows a
relationship approach and the customer responds in a transaction mode. By isolating
customer needs and the costs of augmented service features, the marketer is better
equipped to profitably match product offerings to the particular customer’s needs.
The goal of a relationship is to enable the buyer and seller to maximize joint
value. This points to the need for a formal evaluation of relationship outcomes. For
example, sales executives at best-practice firms work closely with their partnership
accounts to establish mutually defined goals. After an appropriate period, partnerships
that do not meet these goals are downgraded and shifted from the strategic market
sales force to the geographic sales force.
Business marketers should also continually update the value of their product and
relationship offering. Attention here should center on particular new services that
might be incorporated as well as on existing services that might be unbundled or
curtailed. Working relationships with customer firms are among the most important
marketing assets of the firm. They deserve delicate care and continual nurturing!
Strategic Alliances
Not only do business marketing managers form close relationships with customers,
they also develop close bonds with other firms. Strategic alliances have become an
important tool for achieving a sustainable competitive advantage for leading business firms. To that end, the top 500 global businesses have an average of 60 major
strategic alliances each.50 Strategic alliances involve “a formal long-run linkage,
funded with direct co-investments by two or more companies, that pool complementary capabilities and resources to achieve generally agreed objectives.”51 In contrast, a
joint venture involves the formation of a separate, independent organization by the
venture partners.
Accessing Complementary Skills
The driving force behind the formation of a strategic alliance is the desire of one firm
to leverage its core competencies by linking them with others who have complementary expertise, thereby expanding the product, market, and geographic scope of the
organization. Simon Hayes, vice president of Enterprise Strategic Alliances at Cisco
Systems, observes: By combining the best that partners have to offer, “strategic alliances are helping companies enhance their strategic presence in the marketplace and
develop new solutions to attract new customers or even create whole new market
categories.”52 Cisco Systems, a recognized leader in partnering and collaboration,
has formed deep, long-term relationships with a host of strategic alliance partners,
including Microsoft, IBM, Hewlett-Packard, Nokia, Fujitsu, Accenture, Intel, Italtel,
50 Jeffrey H. Dyer, Prashant Kale, and Habir Singh, “How to Make Strategic Alliances Work,” MIT Sloan Management
Review 42 (Summer 2001): pp. 37–43. See also Fred A. Kuglin and Jeff Hook, Building, Leading, and Managing Strategic
Alliances (New York: AMACOM, 2007).
51 George S. Day, Market Driven Strategy: Processes for Creating Value (New York: The Free Press, 1990), p. 272.
52 Simon Hayes, “Getting Strategic Alliances Right,” Synnovation 3 (May 2008), p. 72, accessed at www.eds.com/synnovation
on July 5, 2008.
Chapter 4
FIGURE 4.6
Customer Relationship Management Strategies for Business Markets
113
A STRATEGIC ALLIANCE: BEFORE THE HANDSHAKE
Will the alliance create value for our
customers?
Will this alliance generate growth in
our core business?
Some Tough Questions
Before Entering
an Alliance
What are the strengths and
weaknesses of each potential
alliance partner?
Does this alliance present risks to
our business?
How compatible are we, both
culturally and technically?
Are we committed to a long-term
relationship?
SOURCE: Adapted from Simon Hayes, “Getting Strategic Alliances Right,” Synnovation 3 (May 2008): p. 74, accessed at
www.eds.com.
and many others. For example, the Microsoft–Cisco alliance, formed more than a decade ago, addresses the needs of enterprise and small and medium-size (SMB) customers who need affordable, integrated customer relationship management (CRM)
solutions that advance business results and deliver superior customer service. (See
Figure 4.6.)
Benefits of Strategic Alliances
Partners to an alliance seek benefits such as (1) access to markets or to technology (a motivating force for General Electric’s partnerships in China and India);
(2) economies of scale that might be gained by combining manufacturing, R&D, or
marketing activities; (3) faster entry of new products to markets (for example, when
partners with established channels of distribution in different countries swap new
products); and (4) sharing of risk.53 Simply put, there is a tremendous cost—and
risk—when a firm creates its own distribution channels, supply chain network, manufacturing plant, and R&D function in every key market in the world. Also, it takes
time to develop relationships with channel members and customers and to develop
the skills of employees. Alliances provide an inviting option.
53 Kenneth Ohmae, “The Global Logic of Strategic Alliances,” Harvard Business Review 67 (March/April 1989):
pp. 143–154.
114 Part II
Managing Relationships in Business Marketing
Determinants of Alliance Success
Although offering significant benefits, alliances often fall short of expectations or dissolve. Managing an alliance involves special challenges. Therefore, the ability to form
and manage strategic alliances more effectively than rivals can be an important source
of competitive advantage.
Building a Dedicated Alliance Function While many firms generate positive
results from strategic alliances, an elite group of firms has demonstrated the capability to generate superior alliance value as measured by the extent to which the alliance
met its stated objectives, the degree to which the alliance enhanced the company’s
competitive position, stock market gains from alliance announcements, and related
performance dimensions. Included among the top performers are firms such as
Hewlett-Packard, Oracle, Eli Lily & Company, and others. How did they do it? By
creating a dedicated strategic alliance function—headed by a vice president or director of strategic alliances with his or her own staff and budget, says Jeffrey H. Dyer and
his research team.54 “The dedicated function coordinates all alliance-related activity
within the organization and is charged with institutionalizing processes and systems
to teach, share, and leverage prior alliance management experience and know-how
throughout the company.”55 Simon Hayes, the Cisco vice president who heads the
dedicated alliance function, says:
At Cisco, we’re investing in our alliances with best-practice “videos on
demand,” strategic alliance leadership-development programs, and strategic
scenario-analysis workshops. We believe that the best way to show commitment is with a dedicated, trained, and capable alliance team.56
Developing a Joint Value Proposition Even before negotiations begin, the partners should develop a strategy map that details the shared strategy and the specific
value proposition that the partners will deliver to the customer. A close and concise statement of the value proposition is an essential step to getting the organization aligned around a common view of the alliance strategy goals, agreeing upon the
unique benefits that the partners will jointly offer to customers.
Developing Close Working Relationships Rosabeth Moss Kanter emphasizes:
“Alliances . . . require a dense web of interpersonal connections and internal infrastructures that enhance learning.”57 Observe the interpersonal connections that unite
two Fortune 500 firms (referred to as Alpha Communications and Omega Financial
Services) in an alliance that markets a cobranded credit and calling card targeted to
the business market (see Figure 4.7). The lines connect alliance personnel who have
frequent and important communications and who consider the working relationship
to be close. These managers are the core participants in the work of the alliance,
in contrast to others who are more loosely connected to the alliance team in each
54 Dyer, Kale, and Singh, “How to Make Alliances Work,” p. 37.
55 Ibid., p. 38.
56 Hayes, “Getting Strategic Alliances Right,” p. 76.
57 Kanter, “Collaborative Advantage,” p. 97.
Chapter 4
Customer Relationship Management Strategies for Business Markets
115
SOCIAL CONNECTIONS IN AN ALLIANCE
FIGURE 4.7
Omega
Alpha
22
17
2
3
5
34
20
38
35
14
26
25
36
7
16
8
12
9
31
11
27
19
24
4
13
39
21
15
41
33
Boundary Spanners
1
Peripheral
Participants
Core
Participants
40
37
29
42
23
6
10
28
18
30
32
Peripheral
Participants
Strong Linkages Across Firms
Strong Linkages Within Firms
Most Senior Executive
Project Manager
SOURCE: Reprinted from Michael D. Hutt, Edwin R. Stafford, Beth A. Walker, and Peter H. Reingen, “Defining the
Social Network of a Strategic Alliance: A Case Study,” MIT Sloan Management Review 41 (Winter 2000): p. 56, by permission
of the publisher. Copyright © 2000 by Massachusetts Institute of Technology. All rights reserved.
organization (peripheral participants). The interpersonal links among the core
participants are the circuits through which alliance information flows, decisions are
made, and conflicts are resolved.
Boundary-Spanning Connections Fundamental to the success of the alliance are
the working relationships (those connected by the dark lines in Figure 4.7) that span
organizational boundaries and unite the partnering firms. These boundary-spanning
managers (for example, #12 in Alpha and #39 in Omega) have strong communication
and friendship links with other managers both within their respective organizations
and within the partnering firm. Frequent interactions, the timely exchange of information, and accurate feedback on each partner’s actions will minimize misperceptions and strengthen cooperation in an alliance. Likewise, communication among
boundary-spanning personnel produces a shared interpretation of goals and common
agreement on norms, work roles, and the nature of social relationships.
As close working relationships develop among the alliance participants, psychological contracts, based on trust and shared goals, replace the formal alliance agreement. Psychological contracts consist of unwritten and largely nonverbalized sets
of congruent expectations and assumptions held by the parties to the alliance about
116 Part II
Managing Relationships in Business Marketing
each other’s prerogatives and obligations.58 By promoting openness and flexibility, these interpersonal bonds can speed alliance progress—decisions can be made
quickly, unexpected events can be more readily handled, learning is enhanced, and
new possibilities for joint action emerge.
Integrating Points of Contact Firms that are adept at managing strategic alliances
use a flexible approach, letting their alliances evolve in form as conditions change over
time. They invest adequate resources and management attention in these relationships,
and they integrate the organizations so that the appropriate points of contact and communication are managed. Successful alliances achieve five levels of integration:59
1. Strategic integration, which entails continuing contact among senior executives
to define broad goals or discuss changes in each company;
2. Tactical integration, which brings middle managers together to plan joint
activities, to transfer knowledge, or to isolate organizational or system changes
that will improve interfirm connections;
3. Operational integration, which provides the information, resources, or personnel
that managers require to carry out the day-to-day work of the alliance;
4. Interpersonal integration, which builds a necessary foundation for personnel in
both organizations to know one another personally, learn together, and create
new value; and
5. Cultural integration, which requires managers involved in the alliance to have
the communication skills and cultural awareness to bridge the differences.
The Social Ingredients of Alliance Success60
In a strategic alliance, interpersonal relationships matter. The goals of an alliance
cannot be realized in practice until many managers in both organizations know one
another personally and take coordinated action to create new value together. Indeed,
many alliances that appear to make strategic sense fail to meet expectations because
little attention is given to cultivating the interpersonal connections and communication patterns that underlie effective collaboration. Strong interpersonal ties must be
forged to unite managers in the partnering organizations and continuing boundaryspanning activity is required at multiple managerial levels as a relationship evolves.
Laying the Foundation Alliance negotiations set the tone for the relationship.
Smooth alliance negotiations rest on finding the proper balance between the formal,
legal procedures that establish detailed contractual safeguards for the parties and the
informal, interpersonal processes that are crucial in the successful execution of alliance strategy.
58 Peter Smith Ring and Andrew H. Van de Ven, “Developmental Processes of Cooperative Interorganizational Processes,”
Academy of Management Review 19 (January 1992): pp. 90–118.
59 Kanter, “Collaborative Advantage,” pp. 105–107.
60 This section is based on Michael D. Hutt, Edwin R. Stafford, Beth A. Walker, and Peter H. Reingen, “Defining the
Social Network of a Strategic Alliance: A Case Study,” MIT Sloan Management Review 41 (Winter 2000): pp. 51–62.
Chapter 4
Customer Relationship Management Strategies for Business Markets
117
Legal documents that establish an alliance and specify the boundaries in elaborate
detail are still not complete and exhaustive. Countless ambiguities become evident as
middle managers begin to flesh out the specific elements of the alliance plan. To resolve
these issues and move the alliance forward, it is here that personal relationships begin
to develop and supplement formal role relationships. Alliance negotiations should be
structured in a manner that promotes the development of these interpersonal ties.
Experts suggest that more effective transactions are likely to evolve when managers, rather than lawyers, develop and control the negotiation strategy.61 In turn,
“negotiations appear to go more smoothly when parties from different organizations
interact with their role counterparts (for example, managers to managers or lawyers to
lawyers).”62 Interactions between lawyers are largely based on institutionalized professional norms, center on a specific activity, and take place over a relatively short period
of time. A signed agreement culminates the work of the lawyers; manager-to-manager
relationships formed during negotiations provide the social structure through which
the goals of the alliance can be realized.
Isolating Top-Management’s Role Beyond establishing joint goals and determining how the alliance fits each firm’s total strategy, senior executives define the meaning
of the relationship and signal its importance to personnel in the respective firms. Topmanagement’s involvement in a strategic alliance encompasses much more than merely
appointing an alliance manager or project leader. In addition to creating a dedicated
strategic alliance function, many business-to-business firms, like General Electric and
Cisco, appoint an executive sponsor for each alliance. For an alliance-based strategy to
succeed, an ongoing level of backing from top management is required.
Executive leadership also assumes a critical role in communicating the strategic
role of the alliance and in creating an identity for the alliance within the organization.
A senior executive’s personal involvement galvanizes support for an alliance throughout the organization. Moreover, direct ties at the top-management level across partnering firms spawn organizational commitment and more active involvement between
managers at multiple levels of the hierarchy. If visible participation by senior executives is lacking, the members of the alliance team will begin to question the importance
of the initiative to their firm and the value of team membership to their careers.
Cultivating a Network of Relationships To achieve alliance goals, a well-integrated
communication and work-flow network among managers is required within and across
firms. A regular audit of evolving social, work, and communication ties can be a valuable tool for management in gauging the health of an alliance and in spotting problem
areas. In reviewing the alliance network, attention first should center on relationship patterns at multiple levels. In particular, connections should be examined among
operating personnel who require timely access to information and resources; between
the project leaders who establish the climate for the alliance, craft the strategy, and
manage execution; and among senior managers who signal the importance of the
relationship in their respective organizations, lend critical support at key points, and
are central to discussions of new opportunities for successful collaboration.
61 Peter Smith Ring and G. Rands, “Sensemaking, Understanding, and Committing: Emergent Transaction Processes in
the Evolution of 3M’s Microgravity Research Programs,” in A.H. Van de Ven, H. Angle, and M. S. Poole, eds., Research
on the Management of Innovation: The Minnesota Studies (New York: Ballinger/Harper & Row, 1989), pp. 337–366.
62 Peter Smith Ring and Andrew H. Van de Ven, “Developmental Processes of Cooperative Interorganizational Processes,”
Academy of Management Review 19 (January 1992): p. 109.
118 Part II
Managing Relationships in Business Marketing
Summary
Relationships, rather than simple transactions, provide the central focus in business
marketing. By demonstrating superior skills in managing relationships with key customers as well as with alliance partners, business marketing firms can create a collaborative advantage.
To develop profitable relationships with customers, business marketers must first
understand the different forms that exchange relationships can take. Transactional
exchange centers on the timely exchange of basic products and services for highly
competitive market prices. By contrast, collaborative exchange involves very close personal, informational, and operational connections the parties develop to achieve longterm mutual goals. Across the relationship spectrum, different types of relationships
feature different relationship connectors. For example, collaborative relationships for
important purchases emphasize operational linkages that integrate the operations of
the buying and selling organizations and involve high levels of information exchange.
Activity-based costing provides a solid foundation for measuring and managing
the profitability of individual customers. When the full costs of serving customers
are known, many companies find that 15 to 20 percent of the customers generate
100 percent (or much more) of the profits, a large group of customers break even, and
5 to 10 percent of the customers generate sizable losses. By measuring the cost-toserve and the net profit from individual customers, business marketing managers
can take actions to transform unprofitable relationships into profitable ones through
process improvements, menu-based pricing, or relationship management.
Customer relationship management involves aligning customer strategy and
business processes for the purpose of improving customer loyalty and, eventually,
corporate profitability. To that end, a customer strategy encompasses (1) acquiring
the right customers, (2) crafting the right value proposition, (3) instituting the best
processes, (4) motivating employees, and (5) learning to retain customers.
The driving force behind the formation of a strategic alliance is the desire of one
firm to leverage its core competencies by linking with another firm that has complementary expertise, thereby creating joint value and new market opportunities. Firms adept at
managing strategic alliances create a dedicated alliance function, develop a shared strategy map and a clear value proposition that the partners will provide to target customers,
and nurture the interpersonal relationships that are crucial to success. A well-integrated
communication and work-flow network is required within and across firms. And senior
executives’ personal involvement galvanizes crucial support. A regular audit of evolving
relationship ties can be a valuable tool for gauging an alliance’s health.
Discussion Questions
1. A marketing research company found that 6 percent of its clients
generated 30 percent of sales and nearly all of its profits. At the other
end of the continuum, 70 percent of its clients provided annual billings
(revenue) that were below break-even levels, because these customers
required an extensive amount of service from research employees. The
company took immediate action to terminate relationships with clients
who would not give them a higher share of their marketing research
expenditures. Evaluate this decision and suggest a set of criteria that the
firm might use to screen new clients.
Chapter 4
Customer Relationship Management Strategies for Business Markets
119
2. Describe how a firm might use menu-based pricing to restore
profitability to a high-cost-to-serve customer who demands extensive
service and customized support.
3. Evaluate this statement: Large customers tend to be either the most or
least profitable in the customer base of a business-to-business firm.
4. Sony develops “collaborative relationships” with some suppliers and
“transactional relationships” with other suppliers. What criteria would
purchasing executives use in segmenting suppliers into these two
categories? Describe the steps a business marketer might take to move
the relationship with Sony from a transaction relationship to a more
collaborative one.
5. Some consulting organizations persuasively argue that by properly
incorporating suppliers into their product-development process, firms
can cut their bills for purchased parts and materials by as much as
30 percent. Explore how a buyer-seller partnership might create these
cost savings.
6. Concerning buyer-seller relationships, compare and contrast the features
of a collaborative relationship versus a transactional relationship in the
business market. Describe how the operational linkages might differ by
relationship type.
7. Why is the cost of serving a long-standing customer far less than the
cost of acquiring a new customer?
8. Discuss the switching costs that Southwest Airlines would incur if
it began to phase out its fleet of Boeing airliners with replacements
from Airbus. What steps could Airbus take to reduce these switching
costs? How might Boeing counter to strengthen its relationship with
Southwest?
9. Describe how an office supply firm may have a core offering of products
and services for a small manufacturer and an augmented offering for a
university.
10. Knowing how to be a good partner is an asset in the business market
as Cisco Systems clearly demonstrates. Describe the characteristics
of a successful strategic alliance and outline the steps that alliance
partners can take to increase the odds that alliance goals will be
achieved.
Internet Exercises
1. Oracle Corporation provides customer relationship management
software solutions to all sectors of the business market. Go to http://
oracle.com and review “success stories” and
a. identify a particular Oracle customer from the government sector, and
b. describe the benefits that this government customer received from
the software solution.
CASE
Hewlett-Packard Challenges from a Diverse Mix
of Demanding Customers
Hewlett Packard (H-P) serves a diverse set of customers in the business market and
devotes special attention to the Global 1,000—the 1,000 largest enterprises in the
world. Across these organizations, however, different perspectives and approaches are
used in making information technology (IT) purchases. This diversity across customer
groups presents a host of challenges for H-P.
• Customer Group A demands a wide variety of IT products, routine maintenance
support, and customized services. These customers value the relationship with
H-P and are willing to pay a premium for product and service quality.
• Customer Group B wants high-quality IT products (e.g., printers, servers) but,
most of all, these customers want a rock-bottom price and choose suppliers on
that basis.
• Customer Group C demands both quality products and extensive service support
but wants all of this for a “rock-bottom” price. These customers will freely switch
from one supplier to the next. As competition intensifies for H-P and others in
the IT sector, more customers are moving into this group each month.
First, describe how H-P might develop a portfolio of relationship strategies to meet
the needs of such diverse customer groups. Second, some customers in each group are
more costly to serve than others. How should such cost differences be reflected in the
particular relationship strategies that H-P follows? Third, what strategies can H-P follow to increase the switching costs of customers in Group B or Group C or increase
the profits it derives from these customer groups?
120
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III
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OPPORTUNITIES
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CHAPTER
5
Segmenting the Business Market
and Estimating Segment Demand
The business marketing manager serves a market comprising many different types
of organizational customers with varying needs. Only when this aggregate market is
broken down into meaningful categories can the business marketing strategist readily and profitably respond to unique needs. Once the segments are determined, then
the marketer must estimate demand for each segment. Accurate projections of future
sales are one of the most significant and challenging dimensions of organizational
demand analysis. After reading this chapter, you will understand:
1. the benefits of and requirements for segmenting the business market.
2. the potential bases for segmenting the business market.
3. a procedure for evaluating and selecting market segments.
4. the role of market segmentation in the development of business marketing
strategy.
5. a process for estimating demand in each market segment.
6. specific techniques to effectively develop a forecast of demand.
123
124 Part III
Assessing Market Opportunities
A strategist at Hewlett-Packard notes:
Knowing customers’ needs is not enough. . . . We need to know what new
products, features, and services will surprise and delight them. We need to
understand their world so well that we can bring new technology to problems
that customers may not yet truly realize they have.1
High-growth companies, large and small, succeed by
• selecting a well-defined group of potentially profitable customers.
• developing a distinctive value proposition (product and/or service offering) that
meets these customers’ needs better than their competitors.
• focusing marketing resources on acquiring, developing, and retaining profitable
customers.2
The business market consists of three broad sectors—commercial enterprises,
institutions, and government. Whether marketers elect to operate in one or all of these
sectors, they encounter diverse organizations, purchasing structures, and decisionmaking styles. Each sector has many segments; each segment may have unique needs
and require a unique marketing strategy. For example, some customers demonstrate
attractive profit potential and are receptive to a relationship strategy, whereas others
adopt a short-term, transaction focus, suggesting the need for a more streamlined
strategy response.3 The business marketer who recognizes the needs of the various
market segments is best equipped to isolate profitable market opportunities and respond with an effective marketing program.
Once market segments are defined, it is then necessary to forecast the expected
demand in each segment. In fact, forecasting of demand is an on-going process because forecasts drive so many of the management activities of the business-to-business
marketer. Demand forecasts provide the basis on which organizations decide on how
to allocate resources, plan manufacturing capacity and output, develop logistics capabilities and strategies, and establish marketing budgets and activities.
The goal of this chapter is to demonstrate how the manager can select and evaluate segments of the business market and then develop accurate estimates of demand.
First, the chapter delineates the benefits of and the requirements for successful market segmentation. Second, it explores and evaluates specific bases for segmenting the
business market. Third, the chapter provides a framework for evaluating and selecting
market segments. Procedures for assessing the costs and benefits of entering alternative market segments and for implementing a segmentation strategy are emphasized.
The final section of the chapter examines the demand forecasting process and explains
the critical aspects of how business marketers create demand forecasts.
1 David E. Schnedler, “Use Strategic Market Models to Predict Customer Behavior,” Sloan Management Review 37 (Spring
1996): p. 92; see also, Eric von Hippel, Stefan Thomke, and Mary Sonnack, “Creating Breakthroughs at 3M,” Harvard
Business Review 77 (September–October 1999): pp. 47–57.
2 Dwight L. Gertz and João P. A. Baptista, Grow to Be Great: Breaking the Downsizing Cycle (New York: The Free Press,
1995), p. 54.
3 Per Vagn Freytog and Ann Højbjerg Clarke, “Business to Business Market Segmentation,” Industrial Marketing Manage-
ment 30 (August 2001): pp. 473–486.
Chapter 5
Segmenting the Business Market and Estimating Segment Demand
125
Business Market Segmentation
Requirements and Benefits
Yoram Wind and Richard N. Cardozo define a market segment as “a group of present or potential customers with some common characteristic which is relevant in explaining (and predicting) their response to a supplier’s marketing stimuli.”4 Effective
segmentation of markets is the first step in crafting a marketing strategy because the
characteristics and needs of each segment will define what elements must be included
in how the firm approaches each of the segments in which they choose to do business.
Segmentation that is done well provides the necessary information for understanding
what elements of the marketing mix are going to be critical in satisfying the target
customers in those segments.
Requirements
Potential customers in a market segment have common characteristics that define
what things are important to them and how they will respond to various marketing
stimuli. The question for the business marketer is: “what are the key criteria for determining which characteristics best define a unique market segment?” A business marketer has four criteria for evaluating the desirability of potential market segments:
1. Measurability—The degree to which information on the particular buyer
characteristics exists or can be obtained.
2. Accessibility—The degree to which the firm can effectively focus its marketing
efforts on chosen segments.
3. Substantiality—The degree to which the segments are large or profitable
enough to be worth considering for separate marketing cultivation.
4. Responsiveness—The degree to which segments respond differently to different
marketing mix elements, such as pricing or product features.
In summary, the art of market segmentation involves identifying groups of
customers that are large and unique enough to justify a separate marketing strategy. The ultimate goal is to have the greatest amount of difference between groups
(segments) and high similarities within them.5
Benefits
If the requirements for effective segmentation are met, several benefits accrue to the
firm. First, the mere attempt to segment the business market forces the marketer to
become more attuned to the unique needs of customer segments. Second, knowing
4 Yoram Wind and Richard N. Cardozo, “Industrial Market Segmentation,” Industrial Marketing Management 3 (March
1974): p. 155; see also Vincent-Wayne Mitchell and Dominic F. Wilson, “Balancing Theory and Practice: A Reappraisal
of Business-to-Business Segmentation,” Industrial Marketing Management 27 (September 1998): pp. 429–455.
5 Jessica Tsai, “The Smallest Slice,” CRM Magazine 12 (2, Feb. 2008): p. 37.
126 Part III
Assessing Market Opportunities
INSIDE BUSINESS MARKETING
How to See What’s Next
Strategists falter when they invest too much
attention to “what is” and too little to “what could
be.” For example, by maintaining a strict focus on
existing market segments and ignoring new ones,
the business marketer may miss important signals
of change that customers are sending.
To break this pattern and spot new market
opportunities, business marketing strategists
should examine three customer groups and the
market signals they are sending:
• Undershot customers—the existing solutions fail to
fully satisfy their needs. They eagerly buy new
product versions at steady or increasing prices.
• Overshot customers—the existing solutions are
too good (for example, exceed the technical
performance required). These customers are
reluctant to purchase new product versions.
• Nonconsuming customers—those who lack the
skills, resources, or ability to benefit from
existing solutions. These customers are forced
to turn to others with greater skills or training
for service.
Although most strategists center exclusive
attention on undershot customers, “watching
for innovations that have the potential to drive
industry change actually requires paying careful
attention to the least demanding, most overshot
customers and non-consumers seemingly on the
fringe of the market.” For example, computing
jobs that were processed by specialists in the
corporate mainframe computer center are now
routinely completed by millions of individuals, and
corporate photocopying centers were disbanded
as low-cost, self-service copiers became a common
fixture in offices across organizations.
SOURCE: Clayton M. Christensen and Scott D. Anthony, “Are
You Reading the Right Signals?” Strategy & Innovation Newsletter
(Cambridge, MA.: Harvard Business School Publishing
Corporation, September/October 2004), p. 5.
the needs of particular market segments helps the business marketer focus productdevelopment efforts, develop profitable pricing strategies, select appropriate channels
of distribution, develop and target advertising messages, and train and deploy the sales
force. Thus, market segmentation provides the foundation for efficient and effective
business marketing strategies.
Third, market segmentation provides the business marketer with valuable guidelines for allocating marketing resources. Business-to-business firms often serve multiple market segments and must continually monitor their relative attractiveness and
performance. Research by Mercer Management Consulting indicates that, for many
companies, nearly one-third of their market segments generate no profit and that
30 to 50 percent of marketing and customer service costs are wasted on efforts to acquire and retain customers in these segments.6 Ultimately, costs, revenues, and profits
must be evaluated segment by segment—and even account by account. As market or
competitive conditions change, corresponding adjustments may be required in the
firm’s market segmentation strategy. Thus, market segmentation provides a basic unit
of analysis for marketing planning and control.
6 Gertz and Baptista, Grow to Be Great, p. 55.
Chapter 5
Segmenting the Business Market and Estimating Segment Demand
127
Bases for Segmenting
Business Markets
Whereas the consumer-goods marketer is interested in securing meaningful profiles
of individuals (demographics, lifestyle, benefits sought), the business marketer profiles
organizations (size, end use) and organizational buyers (decision style, criteria). Thus,
the business or organizational market can be segmented on several bases, broadly classified into two major categories: macrosegmentation and microsegmentation.
Macrosegmentation centers on the characteristics of the buying organization
and the buying situation and thus divides the market by such organizational characteristics as size, geographic location, the North American Industrial Classification
System (NAICS) category, and organizational structure. Such characteristics are
important because they often determine the buying needs of the organization. For
example, in the plastic packaging industry, a recent study identified seven major packaging and disposable market segments—
1. food packaging;
2. lids, caps, closures, overcaps, and packaging dispensers;
3. preforms;
4. pails;
5. pharmaceutical vials and containers;
6. cosmetics and personal-care items; and,
7. disposable cutlery, bowls, cups, and plates.
Collectively, these segments consumed just over 7.3 billion pounds of plastic resins
in 2007.7
These macrosegments are significant to the firms that sell materials and components to the plastic packaging industry because each of the major segments has
somewhat different needs and requirements for the things that they buy based on the
packaging products they are creating. For example, the preform market segment is
the fastest-growing segment, which means that competition in this segment will be
stiff, requiring a highly responsive marketing approach.
In contrast, microsegmentation requires a higher degree of market knowledge,
focusing on the characteristics of decision-making units within each macrosegment—
including buying decision criteria, perceived importance of the purchase, and attitudes toward vendors. Yoram Wind and Richard Cardozo recommend a two-stage
approach to business market segmentation: (1) identify meaningful macrosegments,
and then (2) divide the macrosegments into microsegments.8
In evaluating alternative bases for segmentation, the marketer is attempting to
identify good predictors of differences in buyer behavior. Once such differences are
recognized, the marketer can approach target segments with an appropriate marketing
strategy. Secondary sources of information, coupled with data in a firm’s information
7 Bart Thedinger, “Injection Molders See Growth For Packaging & Disposables,” Plastics Technology 54 (5, May 2008): p. 98.
8 Wind and Cardozo, “Industrial Market Segmentation,” p. 155; see also Mitchell and Wilson, “Balancing Theory and
Practice,” pp. 429–455.
128 Part III
Assessing Market Opportunities
TABLE 5.1
SELECTED MACROLEVEL BASES OF SEGMENTATION
Variables
Illustrative Breakdowns
Characteristics of Buying Organizations
Size (the scale of operations
of the organization)
Geographical location
Usage rate
Structure of procurement
Small, medium, large; based on
sales or number of employees
USA, Asia Pacific, Europe,
Middle East, and Africa
Nonuser, light user, moderate
user, heavy user
Centralized, decentralized
Product/Service Application
NAICS category
End market served
Value in use
Varies by product or service
Varies by product or service
High, low
Characteristics of Purchasing Situation
Type of buying situation
Stage in purchase decision process
New task, modified rebuy, straight rebuy
Early stages, late stages
system, can be used to divide the market into macrolevel segments. The concentration
of the business market allows some marketers to monitor the purchasing patterns of each
customer. For example, a firm that sells paper products—tissues, cups, and napkins—to
the airlines is dealing with just a handful of potential buying organizations in the U.S.
market. There were 12 major airlines operating in the United States in 2007; in comparison, a paper products company selling tissues and the like to ultimate consumers
is dealing with literally millions of potential customers. Such market concentration,
coupled with rapidly advancing marketing intelligence systems, makes it easier for the
business marketer to monitor the purchasing patterns of individual organizations.
Macrolevel Bases
Table 5.1 presents selected macrolevel bases of segmentation. Recall that these are
concerned with general characteristics of the buying organization, the nature of the
product application, and the characteristics of the buying situation.
Macrolevel Characteristics of Buying Organizations The marketer may find it
useful to partition the market by size of potential buying organization. Large buying
organizations may possess unique requirements and respond to marketing stimuli that
are different from those responded to by smaller firms. The influence of presidents,
vice presidents, and owners declines with an increase in corporate size; the influence of other participants, such as purchasing managers, increases.9 Alternatively, the
9 Joseph A. Bellizzi, “Organizational Size and Buying Influences,” Industrial Marketing Management 10 (February 1981):
pp. 17–21; see also Arch G. Woodside, Timo Liukko and Risto Vuori, “Organizational Buying of Capital Equipment
Involving Persons across Several Authority Levels,” Journal of Business & Industrial Marketing 14 (1, 1999): pp. 30–48.
Chapter 5
Segmenting the Business Market and Estimating Segment Demand
129
marketer may recognize regional variations and adopt geographical units as the basis
for differentiating marketing strategies.
Usage rate constitutes another macrolevel variable. Buyers are classified on a continuum ranging from nonuser to heavy user. Heavy users may have needs different from
moderate or light users. For example, heavy users may place more value on technical or delivery support services than their counterparts. Likewise, an opportunity may exist to convert moderate users into heavy users through adjustments in the product or service mix.
The structure of the procurement function constitutes a final macrolevel characteristic of buying organizations. Firms with a centralized purchasing function
behave differently than do those with decentralized procurement (see Chapter 3).
The structure of the purchasing function influences the degree of buyer specialization, the criteria emphasized, and the composition of the buying center. Centralized
buyers place significant weight on long-term supply availability and the development
of a healthy supplier complex. Decentralized buyers tend to emphasize short-term
cost efficiency.10 Thus the position of procurement in the organizational hierarchy
provides a base for categorizing organizations and for isolating specific needs and
marketing requirements. Many business marketers develop a national accounts sales
team to meet the special requirements of large, centralized procurement units.
Product/Service Application Because a specific industrial good is often used in
different ways, the marketer can divide the market on the basis of specific end-use
applications. The NAICS system and related information sources are especially valuable for this purpose (see Chapter 2). To illustrate, the manufacturer of a component
such as springs may reach industries incorporating the product into machine tools,
bicycles, surgical devices, office equipment, telephones, and missile systems. Similarly, Intel’s microchips are used in household appliances, retail terminals, toys, cell
phones, and aircraft as well as in computers. By isolating the specialized needs of each
user group as identified by the NIACS category, the firm is better equipped to differentiate customer requirements and to evaluate emerging opportunities.
Value in Use Strategic insights are also provided by exploring the value in use of various customer applications. Recall our discussion of value analysis in Chapter 2. Value
in use is a product’s economic value to the user relative to a specific alternative in a particular application. The economic value of an offering frequently varies by customer
application. Milliken & Company, the textile manufacturer, has built one of its businesses
by becoming a major supplier of towels to industrial laundries. These customers pay
Milliken a 10 percent premium over equivalent towels offered by competitors.11 Why?
Milliken provides added value, such as a computerized routing program that improves the
efficiency and effectiveness of the industrial laundries’ pick-up and delivery function.
The segmentation strategy adopted by a manufacturer of precision motors further
illuminates the value-in-use concept.12 The firm found that its customers differed in
the motor speed required in their applications and that a dominant competitor’s new,
low-priced machine wore out quickly in high- and medium-speed applications. The
marketer concentrated on this vulnerable segment, demonstrating the superior life
10 Timothy M. Laseter, Balanced Sourcing: Cooperation and Competition in Supplier Relationships (San Francisco: Jossey-Bass,
1998), pp. 59–86.
11 Philip Kotler, “Marketing’s New Paradigm: What’s Really Happening Out There,” Planning Review 20 (September–
October 1992): pp. 50–52.
12 Robert A. Garda, “How to Carve Niches for Growth in Industrial Markets,” Management Review 70 (August 1981): pp. 15–22.
130 Part III
Assessing Market Opportunities
TABLE 5.2
EXAMPLE OF MACROSEGMENTATION: AIRCRAFT INDUSTRY
Macro Segment 1: Civilian Aircraft
Sub-segments
A. Airliners
B. Cargo planes
C. General aviation
D. Agricultural aircraft
E. Business aircraft
F. Civilian Seaplane, Flying Boats, and Amphibious Aircraft
G. Civilian Helicopters
H. Sailplanes
I. Civil Research Aircraft, Prototypes and Specials
Macro Segment 2: Military Aircraft
Sub-segments
A. Bombers, Strike, Ground attack, gunships
B. Patrol, Anti-Submarine and Electronic Warfare aircraft
C. Military transports, tankers, and utility
D. Reconnaissance aircraft
E. Close air support/Counterinsurgency
F. Fighter aircraft, nightfighters and heavy fighters
G. Military Trainers
H. Military Helicopters and autogyros
I. Military Research Aircraft, Prototypes and Specials
SOURCE: http://en.wikipedia.org/wiki/List_of_aircraft_by_category, June 2008.
cycle cost advantages of the firm’s products. The marketer also initiated a long-term
program to develop a competitively priced product and service offering for customers
in the low-speed segment.
Purchasing Situation A final macrolevel base for segmenting the organizational
market is the purchasing situation. First-time buyers have perceptions and information needs that differ from those of repeat buyers. Therefore, buying organizations
are classified as being in the early or late stages of the procurement process, or, alternatively, as new-task, straight rebuy, or modified rebuy organizations (see Chapter 3).
The position of the firm in the procurement decision process or its location on the
buying situation continuum dictates marketing strategy.
These examples illustrate those macrolevel bases of segmentation that business marketers can apply to the organizational market. Other macrolevel bases may more precisely fit a specific situation. A key benefit of segmentation is that it forces the manager to
search for bases that explain similarities and differences among buying organizations.
Table 5.2 provides a view of how a manufacturer of aircraft engines might choose
to segment the aircraft market from a macrosegmentation vantage point. Note that
two very large macro segments exist—civilian and military. Within each of these large
Chapter 5
TABLE 5.3
Segmenting the Business Market and Estimating Segment Demand
131
SELECTED MICROLEVEL BASES OF SEGMENTATION
Variables
Illustrative Breakdowns
Key criteria
Purchasing strategies
Structure of decision-making unit
Quality, delivery, supplier reputation
Single source . . . multiple sources
Major decision participants (for example,
purchasing manager and plant manager)
High importance . . . low importance
Innovator . . . follower
Importance of purchase
Organizational innovativeness
Personal characteristics
Demographics
Decision style
Risk
Confidence
Job responsibility
Age, educational background
Normative, conservative, mixed mode
Risk taker, risk avoider
High . . . low
Purchasing, production, engineering
segments there are several very large macro subsegments. A jet engine manufacturer,
like General Electric, would most likely begin the segmentation process in this fashion, looking carefully at the engine requirements for each of the several subsegments.
The engine requirements in each segment may turn out to be very different, requiring different-size engines each capable of operating in very different conditions and
environments. It could turn out that after detailed analysis of the needs in each subsegment, even further marcosegmentation may be necessary. For example, the “airliner”
segment in the civilian macrosegment might be further segmented into regional jets
versus full-size passenger jets. And then the full-size passenger jet airplane segment
can be divided into specific types of aircraft, such as Boeing 737 or Airbus 340.
Microlevel Bases
Having identified macrosegments, the marketer often finds it useful to divide each macrosegment into smaller microsegments on the basis of the similarities and differences
between decision-making units. Often, several microsegments—each with unique requirements and unique responses to marketing stimuli—are buried in macrosegments.
To isolate them effectively, the marketer must move beyond secondary sources of information by soliciting input from the sales force or by conducting a special market
segmentation study. Selected microbases of segmentation appear in Table 5.3.
Key Criteria For some business products, the marketer can divide the market according to which criteria are the most important in the purchase decision.13 Criteria
include product quality, prompt and reliable delivery, technical support, price, and supply continuity. The marketer also might divide the market based on supplier profiles
13 Schnedler, “Use Strategic Models,” pp. 85–92; and Kenneth E. Mast and Jon M. Hawes, “Perceptual Differences
between Buyers and Engineers,” Journal of Purchasing and Materials Management 22 (Spring 1986): pp. 2–6; Donald
W. Jackson Jr., Richard K. Burdick, and Janet E. Keith, “Purchasing Agents’ Perceived Importance of Marketing Mix
Components in Different Industrial Purchase Situations,” Journal of Business Research 13 (August 1985): pp. 361–373;
and Donald R. Lehmann and John O’Shaughnessy, “Decision Criteria Used in Buying Different Categories of Products,”
Journal of Purchasing and Materials Management 18 (Spring 1982): pp. 9–14.
132 Part III
Assessing Market Opportunities
that appear to be preferred by decision makers (for example, high quality, prompt delivery, premium price versus standard quality, less-prompt delivery, low price).
Illustration: Price versus Service14 Signode Corporation produces and markets
a line of steel strapping used for packaging a range of products, including steel and
many manufactured items. Facing stiff price competition and a declining market
share, management wanted to move beyond traditional macrolevel segmentation to
understand how Signode’s 174 national accounts viewed price versus service tradeoffs. Four segments were uncovered:
1. Programmed buyers (sales 5 $6.6 million): Customers who were not
particularly price or service sensitive and who made purchases in a routine
fashion—product is not central to their operation.
2. Relationship buyers (sales 5 $31 million): Knowledgeable customers
who valued partnership with Signode and did not push for price or service
concessions—product is moderately important to the firm’s operations.
3. Transaction buyers (sales 5 $24 million): Large and very knowledgeable
customers who actively considered the price versus service trade-offs but often
placed price over service—product is very important to their operations.
4. Bargain hunters (sales 5 $23 million): Large-volume buyers who were very
sensitive to any changes in price or service—product is very important to their
operations.
The study enabled Signode to sharpen its strategies in this mature business market
and to understand more clearly the cost of serving the various segments. Particularly
troubling to management was the bargain-hunter segment. These customers demanded
the lowest prices and the highest levels of service and had the highest propensity to
switch. Management decided to use price cuts only as a defense against competitors’ cuts
and directed attention instead at ways to add service value to this and other segments.
Value-Based Strategies Many customers actively seek business marketing firms that
can help them create new value to gain a competitive edge in their markets. Based on a
comprehensive study of its customer base, Dow Corning identified three important customer segments and the value proposition that customers in each segment are seeking15:
innovation-focused customers who are committed to being first to the market
with new technologies and who seek new-product-development expertise and
innovative solutions that will attract new customers;
customers in fast-growing markets who are pressured by competitive battles over
market growth and seek proven performance in technology, manufacturing,
and supply chain management;
customers in highly competitive markets who produce mature products, center on
process efficiency and effectiveness in manufacturing, and seek cost-effective
solutions that keep overall costs down.
14 V. Kasturi Rangan, Rowland T. Moriarty, and Gordon S. Swartz, “Segmenting Customers in Mature Industrial
Markets,” Journal of Marketing 56 (October 1992): pp. 72–82.
15 Eric W. Balinski, Philip Allen, and J. Nicholas DeBonis, Value-Based Marketing for Bottom-Line Success (New York:
McGraw-Hill and the American Marketing Association, 2003), pp. 147–152.
Chapter 5
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133
B2B TOP PERFORMERS
Steering Customers to the Right Channel
Dow Corning Corporation is the world’s largest and
most innovative producer of silicone-based products.
Although the leader in this large and diverse market,
smaller, regional competitors began to take market
share away from Dow Corning by selling low-priced
silicone products with little or no technical support.
Rather than paying for a host of high-quality
services such as new-product-development
assistance that Dow Corning customarily provides,
these customers eagerly sought the lowest price.
To meet the challenge, Dow Corning conducted
a market segmentation study, isolated the
characteristics of this “low-cost” buyer, and created
a no-frills Web-based business model to reach this
customer segment. To avoid confusion with existing
customers and the firm’s premium product lines,
a new brand was created—Xiameter (http://www
.xiameter.com).
To clarify the brand premise and the company
connection, the tag line—“The new measure of value
from Dow Corning”—was added. By steering pricesensitive customers to the Internet—a low-cost sales
channel—the branding strategy allows Dow Corning
“to compete head-on with the low-price suppliers of
mature product lines, without damaging its position
as a value-added leader at the premium price end of
the market.” Customers, from the United States to
high-growth potential countries like China, have
responded positively to the Xiameter brand. (See the
Dow Corning ad in Figure 5.1.)
SOURCE: Bob Lamons, “Dow Targets Segment to Keep Market
Share,” Marketing News, June 15, 2005, p. 8. See also Randall
S. Rozin and Liz Magnusson, “Processes and Methodologies for
Creating a Global Business-to-Business Brand,” Journal of Brand
Management 10 (February 2003): pp. 185–207.
The marketer can benefit by examining the criteria decision-making units
in various sectors of the business market—commercial, governmental, and
institutional—use. As organizations in each sector undergo restructuring efforts, the
buying criteria key decision makers use also change. For example, the cost pressures
and reform efforts in the health-care industry are changing how hospitals buy medical equipment and pharmaceuticals. To reduce administrative costs and enhance
bargaining power, hospitals are following the lead of commercial enterprises by
streamlining their operations. Also, they are forming buying groups, centralizing
the purchasing function, and insisting on lower prices and better service. Reform
efforts are likewise moving government buyers to search for more efficient purchasing procedures and for better value from vendors. Marketers that respond in this
challenging environment are rewarded.
Purchasing Strategies Microsegments can be classified according to buying organizations’ purchasing strategy. Some buyers seek to have several suppliers, giving each
one a healthy share of their purchase volume; others are more interested in assured
supply and concentrate their purchases with one or perhaps two suppliers. Raytheon,
the manufacturer of small airplanes for the civilian and business aircraft market decided
on a strategy of concentration. They rely on one firm—Castle Metals—to supply all
of its needs for the different metals used in an aircraft. The company may reassess its
sole supplier every so often, but any “out-supplier” in this situation would have a very
difficult time securing some of Raytheon’s business. In another case, Toyota looks
for suppliers who are able to make suggestions for improving its business operations.
134 Part III
Assessing Market Opportunities
FIGURE 5.1
AN AWARD-WINNING AD BY DOW CORNING FOR ITS WEB-BASED
BUSINESS MODEL
SOURCE: Reprinted by permission of XIAMETER.
Toyota has realized that many of the innovations it has developed in its processes have
come from suggestions by their suppliers. So a key strategy for Toyota is to identify suppliers who are creative and invest in new technology for possibly improving
Toyota’s business.
Chapter 5
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135
Structure of the Decision-Making Unit The structure of the decision-making
unit, or buying center, likewise provides a way to divide the business market into subsets of customers by isolating the patterns of involvement in the purchasing process
of particular decision participants (for example, engineering versus top management).
For the medical equipment market, DuPont initiated a formal positioning study
among hospital administrators, radiology department administrators, and technical
managers to identify the firm’s relative standing and the specific needs (criteria) for
each level of buying influence within each segment.16 The growing importance of
buying groups, multihospital chains, and nonhospital health-care delivery systems
pointed to the need for a more refined segmentation approach.
The study indicates that the medical equipment market can be segmented on the
basis of the type of institution and the responsibilities of the decision makers and
decision influencers in those institutions. The structure of the decision-making unit
and the decision criteria used vary across the following three segments:
• Groups that select a single supplier that all member hospitals must use, such as
investor-owned hospital chains;
• Groups that select a small set of suppliers from which individual hospitals may
select needed products;
• Private group practices and the nonhospital segment.
Based on the study, DuPont’s salespersons can tailor their presentations to the
decision-making dynamics of each segment. In turn, advertising messages can be
more precisely targeted. Such an analysis enables the marketer to identify meaningful
microsegments and respond with finely tuned marketing communications.
Importance of Purchase Classifying organizational customers on the basis of the
perceived importance of a product is especially appropriate when various customers
apply the product in various ways. Buyer perceptions differ according to the effect
of the product on the total mission of the firm. A large commercial enterprise may
consider the purchase of consulting services routine; the same purchase for a small
manufacturing concern is “an event.”
Organizational Innovativeness Some organizations are more innovative and
willing to purchase new industrial products than others. A study of the adoption of
new medical equipment among hospitals found that psychographic variables can
improve a marketer’s ability to predict the adoption of new products.17 These include
such factors as an organization’s level of change resistance or desire to excel. When
psychographic variables are combined with organizational demographic variables
(for example, size), accuracy in predicting organizational innovativeness increases.
Because products diffuse more rapidly in some segments than in others, microsegmentation based on organizational innovativeness enables the marketer to identify
segments that should be targeted first when it introduces new products. The accuracy
16 Gary L. Coles and James D. Culley, “Not All Prospects Are Created Equal,” Business Marketing 71 (May 1986): pp. 52–57.
17 Thomas S. Robertson and Yoram Wind, “Organizational Psychographics and Innovativeness,” Journal of Consumer
Research 7 (June 1980): pp. 24–31; see also Thomas S. Robertson and Hubert Gatignon, “Competitive Effects on
Technology Diffusion,” Journal of Marketing 50 (July 1986): pp. 1–12.
136 Part III
Assessing Market Opportunities
of new product forecasting also improves when diffusion patterns are estimated segment by segment.18
Personal Characteristics Some microsegmentation possibilities deal with the personal characteristics of decision makers: demographics (age, education), personality,
decision style, risk preference or risk avoidance, confidence, job responsibilities, and
so forth. Although some interesting studies have shown the usefulness of segmentation based on individual characteristics, further research is needed to explore its
potential as a firm base for microsegmentation.
Illustration: Microsegmentation19
Philips Lighting Company, the North American division of Philips Electronics, found
that purchasing managers emphasize two criteria in purchasing light bulbs: how much
they cost and how long they last. Philips learned, however, that the price and life of bulbs
did not account for the total cost of lighting. Because lamps contain environmentally
toxic mercury, companies faced high disposal costs at the end of a lamp’s useful life.
New Product and Segmentation Strategy To capitalize on a perceived opportunity, Philips introduced the Alto, an environmentally friendly bulb that reduces customers’ overall costs plus allows the buying organization to demonstrate environmental
concern to the public. Rather than targeting purchasing managers, Philips’s marketing
strategists centered attention on chief financial officers (CFOs), who embraced the cost
savings, and public relations executives, who saw the benefit of purchasing actions that
protect the environment. By targeting different buying influentials, Philips created a
new market opportunity. In fact, the Alto has already replaced more than 25 percent of
traditional fluorescent lamps in U.S. stores, schools, and office buildings.
The Segmentation Process
Macrosegmentation centers on characteristics of buying organizations (for example,
size), product application (for example, end market served), and the purchasing situation (for example, stage in the purchase decision process). Microsegmentation concentrates on characteristics of organizational decision-making units—for instance, choice
criteria assigned the most importance in the purchase decision.
Choosing Market Segments
Business marketers begin the segmentation process at the macro level. If they find
that the information about the macro segments is sufficient to develop an effective
18 Yoram Wind, Thomas S. Robertson, and Cynthia Fraser, “Industrial Product Diffusion by Market Segment,” Industrial
Marketing Management 11 (February 1982): pp. 1–8.
19 W. Chan Kim and Renée Mauborgne, “Creating New Market Space,” Harvard Business Review 77 (January–February
1999): pp. 88–89. For other segmentation studies, see Mark J. Bennion Jr., “Segmentation and Positioning in a Basic
Industry,” Industrial Market Management 16 (February 1987): pp. 9–18; Arch G. Woodside and Elizabeth J. Wilson,
“Combining Macro and Micro Industrial Market Segmentation,” in Advances in Business Marketing, ed. Arch G. Woodside (Greenwich, CT: JAI Press, 1986), pp. 241–257; and Peter Doyle and John Saunders, “Market Segmentation and
Positioning in Specialized Industrial Markets,” Journal of Marketing 49 (Spring 1985): pp. 24–32.
Chapter 5
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137
INSIDE BUSINESS MARKETING
A Fresh Approach to Segmentation: Customer Service Segmentation
Conceptually, customer service segmentation
involves identifying groups of customers for
which a company will provide types and levels of
service. It works on the premise that the service
requirements, as well as the associated cost-toserve and profit potential, vary by customer tier.
The exhibit shows the differentiated services
that are aligned with each customer segment.
The lowest-tier customers require the basic
services, some special services are added for midtier customers, and top-tier customers get the
complete service assortment plus some high-level
value-added services.
Service-segment alignments are depicted as
double-sided arrows in the exhibit to represent the
point that customer needs and service offerings
are aligned in accordance with strategic “pushpull” objectives. The goal is to develop a customer
service strategy that responds to the unique
requirements of particular segments, maintains a
tight grasp on costs, and advances profit growth
by segment.
SOURCE: Larry Lapide, “Segment Strategically,” Supply Chain
Management Review 12 (5, May/June 2008): pp. 8–9.
Illustrative Customer Segmentation & Differentiated Services Alignment
Differentiated Services
High Tier Services
• Sharing of downstream data (e.g., POS)
• Sharing of replenishment plans and
sales forecasts
• Co-managed inventory programs
Mid-Tier Services
• Special handling and packaging
• Reduced delivery cycle times
• Full-truckload discounts
Basic Services
• Standard delivery cycle time
• Standard handling and packaging
Customer Services
Alignment
Alignment
Alignment
TopTier
MidTier
LowestTier
marketing strategy, then it may not be necessary to go on to any further micrcosegmentation. However, if they cannot develop a distinct strategy based on the macrosegment, then it may be necessary to undertake research on microsegmentation
variables within each macrosegment. A marketing research study is often needed to
identify characteristics of decision-making units, as the Philips Lighting case illustrated. At this level, chosen macrosegments are divided into microsegments on the
basis of similarities and differences between the decision-making units to identify
small groups of buying organizations that each exhibit a distinct response to the firm’s
marketing strategy. As firms develop more segments with special requirements, it
138 Part III
Assessing Market Opportunities
then becomes necessary to assess whether the cost of developing a unique strategy for
a specific segment is worth the profit to be generated from that segment. The marketer must evaluate the potential profitability of alternative segments before investing
in separate marketing strategies. As firms develop a clearer picture of the revenue and
costs of serving particular segments and customers, they often find that a small group
of customers subsidizes a large group of marginal and, in some cases, unprofitable
customers.20 (See Chapter 4.)
In some cases it may be more effective to examine existing customers in a new
light. As A. G. Lafley and Lam Charam note, “segmentation itself can be an innovative act, if we identify a corner of our market that is rarely treated as a segment. Can
we look at buyers through some other lens than typical tried and true variables like
company size and industry? Identifying an overlooked segment is less expensive than
inventing a new technology and may sprout even more opportunities.”21
One interesting approach in business-to-business marketing today is the rise of
account-based marketing (ABM), perhaps the ultimate expression of the trend toward
smaller and more precisely targeted marketing strategies. ABM is an approach that
treats an individual account as a market in its own right. Done right, it ensures that
marketing and sales are fully focused on a target client’s most important business issues and that they work collaboratively to create value propositions that specifically
address those issues. Far beyond the basics of personalized messaging and segmented
offers, true ABM has the potential to deepen relationships with existing clients and
build profitability by shortening the sales cycle and increasing win rates and solesourced contracts.22
ABM is the ultimate in segmentation, as one company is viewed as a separate segment. This approach may become more prevalent in the future as industry consolidation continues to grow. One could see the commercial aircraft industry as a good
example of this ultimate level of segmentation—only two companies now produce
large, commercial airliners: Boeing and Airbus S.A.S. Similarly, in the diesel locomotive industry in the United States, only General Motors and General Electric make
diesel locomotives.
Isolating Market Segment Profitability
To improve on traditional market segmentation, many business marketing firms categorize customers into tiers that differ in current and/or future profitability to the
firm. “By knowing the characteristics of profitable customers, companies can direct
their marketing efforts to specific segments that are most likely to yield profitable
customers.”23 This requires a process of evaluation that makes explicit the near-term
potential and the longer-term resource commitments necessary to effectively serve
customers in a segment. In particular, special attention is given to the individual drivers of customer profitability, namely the cost-to-serve a particular group of customers
and the revenues that result (see Chapter 4).
20 Arun Sharma, R. Krishnan, and Dhruv Grewal, “Value Creation in Markets: A Critical Area of Focus for Business-
to-Business Markets,” Industrial Marketing Management 30 (June 2001): pp. 391–402.
21 A.G. Lafley and Ram Charan, “Making Inspiration Routine,” Inc 30 (6, June 2008): pp. 98–101.
22 Jeff Sands, “Account-Based Marketing,” B to B, 91 (6, May 8, 2006): p. 11.
23 Robert S. Kaplan and V. G. Narayanan, “Measuring and Managing Customer Profitability,” Journal of Cost Management
15 (September–October 2001): p. 13.
Chapter 5
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139
FedEx Corporation, for example, categorizes its business customers (for internal
purposes) as the good, the bad, and the ugly—based on their profitability.24 Rather
than using the same strategy for all customers, the company assigns a priority to the
good, tries to convert the bad to good, and discourages the ugly. Like many other
firms, FedEx discovered that many customers are too costly to serve and demonstrate little potential to become profitable, even in the long term. By understanding the needs of customers at different tiers of profitability, service can be tailored
to achieve even higher levels of profitability. For example, FedEx encourages small
shippers to bring their packages to conveniently located drop-off points and offers
a rapid-response pick-up service for large shippers. Once profitability tiers are identified, “highly profitable customers can be pampered appropriately, customers of
average profitability can be cultivated to yield higher profitability, and unprofitable
customers can be either made more profitable or weeded out.”25
Implementing a Segmentation Strategy
A well-developed segmentation plan will fail without careful attention to implementing the plan. Successful implementation requires attention to the following issues:
• How should the sales force be organized?
• What special technical or customer service requirements will organizations in
the new segment have?
• Who will provide these services?
• Which media outlets can be used to target advertising at the new segment?
• Has a comprehensive online strategy been developed to provide continuous
service support to customers in this segment?
• What adaptations will be needed to serve selected international market segments?
The astute business marketing strategist must plan, coordinate, and monitor
implementation details. Frank Cespedes points out that “as a firm’s offering becomes
a product-service-information mix that must be customized for diverse segments,
organizational interdependencies increase”26 and marketing managers, in particular,
are involved in more cross-functional tasks. Managing the critical points of contact
with the customer is fundamental to the marketing manager’s role.
Estimating Segment Demand
Looking back at the Internet boom, executives at telecommunications firms like
Alcatel-Lucent and Nortel Networks Corporation now openly acknowledge that they
did not see the steep drop in demand coming. Indeed, spending by phone companies
24 R. Brooks, “Alienating Customers Isn’t Always a Bad Idea, Many Firms Discover,” The Wall Street Journal, January
7, 1999, pp. A1 and A12, discussed in Valarie A. Zeithaml, Roland T. Rust, and Katherine N. Lemon, “The Customer
Pyramid: Creating and Serving Profitable Customers,” California Management Review 43 (Summer 2001): p. 118.
25 Zeithaml, Rust, and Lemon, “The Customer Pyramid,” p. 141.
26 Frank V. Cespedes, Concurrent Marketing: Integrating Product, Sales, and Service (Boston: Harvard Business School Press,
1995), p. 271.
140 Part III
Assessing Market Opportunities
on telecommunications gear nearly doubled from 1996 to 2000, to $47.5 billion; all
forecasts indicated that this attractive growth path would continue.27 During this period, telecom equipment makers were dramatically expanding production capacity and
aggressively recruiting thousands of new employees. However, in 2001, the demand
failed to materialize and the major telecom equipment makers reported significant
financial losses. In turn, firms across the industry announced a series of massive job
cuts. What happened? “Lousy” sales forecasts played an important role, according to
Gregory Duncan, a telecom consultant at National Economic Research Associates.28
The Role of the Demand Estimation
Estimating demand within selected market segments is vital to marketing management. The forecast of demand reflects management’s estimate of the probable level
of company sales, taking into account both potential business and the level and type of
marketing effort demanded. Virtually every decision made by the marketer is based on
a forecast, formal or informal.
Consider a company that wishes to introduce new telecommunications services
to businesses. How large is the market opportunity? An estimate of demand provides the foundation for the planning process. Three broad groups of stakeholders
require demand forecasts: engineering design and implementation teams; marketing
and commercial development teams; and external entities, such as potential investors, government regulators, equipment and application suppliers, and distribution
partners. In the marketing area, commercial questions that must be answered before
launch of service and that depend on the estimate of demand include: Where should
sales outlets be located? How many are required to cover the target market? What
sales levels should be expected from each outlet? What performance targets should
be established for each? Demand forecasts are needed to project the company’s revenues, profits, and cash flow to assess business viability; to determine cash, equity, and
borrowing requirements; and to determine appropriate pricing structures and levels.29
In short, without knowledge of market demand, marketing executives cannot develop
sound strategy and make effective decisions about the allocation of resources.
A primary application of the estimates of demand is clearly in the planning and
control of marketing strategy by market segment. Once demand is estimated for each
segment, the manager can allocate expenditures on the basis of potential sales volume.
Spending huge sums of money on advertising and personal selling has little benefit in
segments where the market opportunity is low. Of course, expenditures would have to
be based on both expected demand and the level of competition. Actual sales in each
segment can also be compared with forecasted sales, taking into account the level of
competition, in order to evaluate the effectiveness of the marketing program.
Consider the experience of a Cleveland manufacturer of quick-connective
couplings for power transmission systems. For more than 20 years, one of its large
distributors had been increasing its sales volume. In fact, this distributor was considered one of the firm’s top producers. The manufacturer then analyzed the estimates
of demand for each of its 31 distributors. The large distributor ranked thirty-first in
27 Dennis K. Berman, “’Lousy Sales Forecasts Helped Fuel the Telecom Mess,” The Wall Street Journal, July 7, 2001, p. B1.
28 Ibid.
29 Peter McBurney, Simon Parsons, and Jeremy Green, “Forecasting Market Demand for New Telecommunications
Services: An Introduction,” Telematics and Information 19 (2002): p. 233.
Chapter 5
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141
INSIDE BUSINESS MARKETING
Accurate Forecasts Drive Effective Collaboration
between Boeing and Alcoa
Alcoa supplies raw aluminum to Boeing for
constructing wings for most of Boeing’s commercial
airplanes. As a result of sharing accurate demand
data with Alcoa, Boeing was able to achieve cost
reductions and improve delivery-time performance
throughout the entire supply chain.
Boeing began by developing an electronic sales
forecast to allow Alcoa to receive the forecast file
directly into its system. Included in the forecast
are all the data Alcoa needed to understand the
demand for the raw aluminum to be used in
constructing aircraft wings. The forecast data were
provided so that they could be loaded into Alcoa’s
system in an efficient manner, and great emphasis
was placed on forecast accuracy. Because forecast
errors would totally undermine the supply process,
Boeing developed a process to identify errors
in demand before communicating the forecasts
electronically to Alcoa. Boeing provides Alcoa
with electronic visibility into its ERP (Enterprise
Resource Planning) System so that Alcoa can
understand when orders will be coming and can
thereby respond more effectively to Boeing’s
needs. In short, Boeing realized that for Alcoa to
make decisions on when it should have materials
in Boeing’s plant, Alcoa had to be given the most
accurate forecast data possible.
In working together in the supply chain, the
electronic sharing of demand forecasts made it
possible for Alcoa to maintain the appropriate
levels of aluminum inventory to meet Boeing’s
requirements.
SOURCE: Adapted from Victoria A. Micheau, “How Boeing
and Alcoa Implemented a Successful Vendor Managed
Inventory Program,” Journal of Business Forecasting 24 (Spring
2005): pp. 17–19.
terms of volume relative to potential business, achieving only 15.4 percent of estimated demand. A later evaluation revealed that the distributor’s sales personnel did
not know the most effective way to sell couplings to its large-customer accounts.
It is important to keep in mind that estimates of probable demand should be made
only after the firm has made decisions about its marketing strategy for a particular segment. Only after the marketing strategy is developed can expected sales be forecasted.
Many firms are tempted to use the forecast as a tool for deciding the level of marketing expenditures. One study (which sampled 900 firms) found that slightly more than
25 percent of the respondent firms set their advertising budgets after the forecast of
demand was developed.30 Small companies whose budgeting and forecasting decisions
were fragmented made up the majority of the firms in this group. Clearly, marketing
strategy is a determinant of the level of sales and not vice versa.
Supply Chain Links Sales forecasts are critical to the smooth operation of the entire supply chain. When timely sales forecast information is readily available to all
firms in the supply chain, plans can be tightly coordinated and all parties share in the
benefits.31 Sales forecast data is used to distribute inventory in the supply chain, manage stock levels at each link, and schedule resources for all the members of a supply
30 Douglas C. West, “Advertising Budgeting and Sales Forecasting: The Timing Relationship,” International Journal of
Advertising 14 (1, 1995): pp. 65–77.
31 John T. Mentzer and Mark A. Moon, “Understanding Demand,” Supply Chain Management Review 8 (May–June 2004): p. 45.
142 Part III
Assessing Market Opportunities
chain that provide materials, components, and services to a manufacturer. Accurate
forecasts go hand-in-hand with good business practices and effective management
policies in directing the entire supply chain process. Specific tools are available to develop accurate estimates of market potential; the business marketer must understand
the purpose of each alternative technique as well as its strengths and limitations.
Methods of Forecasting Demand
Estimating demand may be highly mathematical or informally based on sales force
estimates. Two primary approaches to demand forecasting are recognized: (1) qualitative and (2) quantitative, which includes time series and causal analysis.
Qualitative Techniques
Qualitative techniques, which are also referred to as management judgment or
subjective techniques rely on informed judgment and rating schemes. The sales
force, top-level executives, or distributors may be called on to use their knowledge of
the economy, the market, and the customers to create qualitative demand estimates.
Techniques for qualitative analysis include the executive judgment method, the sales
force composite method, and the Delphi method.
The effectiveness of qualitative approaches depends on the close relationships
between customers and suppliers that are typical in the industrial market. Qualitative techniques work well for such items as heavy capital equipment or when the
nature of the forecast does not lend itself to mathematical analysis. These techniques
are also suitable for new-product or new-technology forecasts when historical data
are scarce or nonexistent.32 An important advantage of qualitative approaches is that
it brings users of the forecast into the forecasting process. The effect is usually an
increased understanding of the procedure and a higher level of commitment to the
resultant forecast.
Executive Judgment According to a large sample of business firms, the executive judgment method enjoys a high level of usage.33 The judgment method, which
combines and averages top executives’ estimates of future sales, is popular because it
is easy to apply and to understand. Typically, executives from various departments,
such as sales, marketing, production, finance, and purchasing, are brought together to
apply their collective expertise, experience, and opinions to the forecast.
The primary limitation of the approach is that it does not systematically analyze
cause-and-effect relationships. Further, because there is no established formula for
deriving estimates, new executives may have difficulty making reasonable forecasts.
The resulting forecasts are only as good as the executives’ opinions. The accuracy of
the executive judgment approach is also difficult to assess in a way that allows meaningful comparison with alternative techniques.34
The executives’ “ballpark” estimates for the intermediate and the long-run
time frames are often used in conjunction with forecasts developed quantitatively.
32 A. Michael Segalo, The IBM/PC Guide to Sales Forecasting (Wayne, PA: Banbury, 1985), p. 21.
33 Nada Sanders, “Forecasting Practices in U.S. Corporations: Survey Results,” Interfaces 24 (March–April 1994): pp. 92–100.
34 Spyros Makridakis and Steven Wheelwright, “Forecasting: Issues and Challenges for Marketing Management,” Journal
of Marketing 41 (October 1977): p. 31.
Chapter 5
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143
However, when historical data are limited or unavailable, the executive judgment
approach may be the only alternative. Mark Moriarty and Arthur Adams suggest that
executive judgment methods produce accurate forecasts when (1) forecasts are made
frequently and repetitively, (2) the environment is stable, and (3) the linkage between
decision, action, and feedback is short.35 Business marketers should examine their forecasting situation in light of these factors in order to assess the usefulness of the executive judgment technique.
Sales Force Composite The rationale behind the sales force composite approach is that salespeople can effectively estimate future sales volume because they
know the customers, the market, and the competition. In addition, participating in
the forecasting process helps sales personnel understand how forecasts are derived
and boosts their incentive to achieve the desired level of sales. The composite forecast is developed by combining the sales estimates from all salespeople. By providing the salesperson with a wealth of customer information that can be conveniently
accessed and reviewed, customer relationship management (CRM) systems (see
Chapter 4) enhance the efficiency and effectiveness of the sales force composite.36
CRM systems also allow a salesperson to track progress in winning new business at
key accounts.
Few companies rely solely on sales force estimates; rather, they usually adjust
or combine the estimates with forecasts developed either by top management or
by quantitative methods. The advantage of the sales force composite method is
the ability to draw on sales force knowledge about markets and customers. This
advantage is particularly important for a market in which buyer-seller relationships are close and enduring. The salesperson is often the best source of information about customer purchasing plans and inventory levels. The method can also
be executed relatively easily at minimal cost. An added benefit is that creating a
forecast forces a sales representative to carefully review these accounts in terms of
future sales.37
The problems with sales force composites are similar to those of the executive
judgment approach: They do not involve systematic analysis of cause and effect, and
they rely on informed judgment and opinions. Some sales personnel may overestimate sales in order to look good or underestimate them in order to generate a
lower quota. Management must carefully review all estimates. As a rule, sales force
estimates are relatively accurate for short-run projections but less effective for longterm forecasts.
Delphi Method In the Delphi approach to forecasting, the opinions of a panel
of experts on future sales are converted into an informed consensus through a
highly structured feedback mechanism.38 As in the executive judgment technique,
35 Mark M. Moriarty and Arthur J. Adams, “Management Judgment Forecasts, Composite Forecasting Models and
Conditional Efficiency,” Journal of Marketing Research 21 (August 1984): p. 248.
36 Robert Mirani, Deanne Moore, and John A. Weber, “Emerging Technologies for Enhancing Supplier-Reseller
Partnerships,” Industrial Marketing Management 30 (February 2001): pp. 101–114.
37 Stewart A. Washburn, “Don’t Let Sales Forecasting Spook You,” Sales and Marketing Management 140 (September
1988): p. 118.
38 Raymond E. Willis, A Guide to Forecasting for Planners and Managers (Englewood Cliffs, NJ: Prentice-Hall, 1987), p. 343.
144 Part III
Assessing Market Opportunities
management officials are used as the panel, but each estimator remains anonymous.
On the fi rst round, written opinions about the likelihood of some future event
are sought (for example, sales volume, competitive reaction, or technological
breakthroughs). The responses to this fi rst questionnaire are used to produce a
second. The objective is to provide feedback to the group so that first-round estimates and information available to some of the experts are made available to the
entire group.
After each round of questioning, the analyst who administers the process assembles, clarifies, and consolidates information for dissemination in the succeeding round. Throughout the process, panel members are asked to reevaluate their
estimates based on the new information from the group. Opinions are kept anonymous, eliminating both “me-too” estimates and the need to defend a position. After
continued reevaluation, the goal is to achieve a consensus. The number of experts
varies from six to hundreds, depending on how the process is organized and its purpose. The number of rounds of questionnaires depends on how rapidly the group
reaches consensus.
Generally, the Delphi technique is applied to long-term forecasting of demand,
particularly for new products or situations not suited to quantitative analysis. This
approach can provide some good ballpark estimates of demand when the products
are new or unique and when there is no other data available. Like all qualitative
approaches to estimating demand, it is difficult to measure the accuracy of the
estimates.
Qualitative forecasting approaches are important in the process of assessing future product demand, and they are most valuable in situations where little data exists
and where a broad estimate of demand is acceptable. New or unique products do
not lend themselves to more quantitative approaches to forecasting, so the qualitative
methods play a very important role in estimating demand for these items.
Quantitative Techniques
Quantitative demand forecasting, also referred to as systematic or objective forecasting, offers two primary methodologies: (1) time series and (2) regression or
causal. Time series techniques use historical data ordered chronologically to
project the trend and growth rate of sales. The rationale behind time series analysis is that the past pattern of sales will apply to the future. However, to discover
the underlying pattern of sales, the analyst must first understand all of the possible
patterns that may affect the sales series. Thus, a time series of sales may include
trend, seasonal, cyclical, and irregular patterns. Once the effect of each has been
isolated, the analyst can then project the expected future of each pattern. Time
series methods are well suited to short-range forecasting because the assumption
that the future will be like the past is more reasonable over the short run than over
the long run.39
Regression or causal analysis, on the other hand, uses an opposite approach,
identifying factors that have affected past sales and implementing them in a mathematical model.40 Demand is expressed mathematically as a function of the items
39 Spyros Makridakis, “A Survey of Time Series,” International Statistics Review 44 (1, 1976): p. 63.
40 Segalo, Sales Forecasting, p. 27.
Chapter 5
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145
that affect it. A forecast is derived by projecting values for each of the factors in
the model, inserting these values into the regression equation, and solving for expected sales. Typically, causal models are more reliable for intermediate than for
long-range forecasts because the magnitude of each factor affecting sales must first
be estimated for some future time, which becomes difficult when estimating farther
into the future.
The specifics of the quantitative approaches to estimating demand are beyond the
scope of this chapter. However, the key aspects of these approaches for the businessto-business manager to keep in mind are as follows:
1. To develop an estimate of demand with time series analysis, the analyst must
determine each pattern (the trend, cycle, seasonal pattern) and then extrapolate
them into the future. This requires a significant amount of historical sales
information. Once a forecast of each pattern is developed, the demand forecast
is assembled by combining the estimates for each pattern.
2. A critical aspect of regression analysis is to identify the economic variable(s)
to which past sales are related. For forecasting purposes, the Survey of Current
Business is particularly helpful because it contains monthly, quarterly, and
annual figures for hundreds of economic variables. The forecaster can test an
array of economic variables from the Survey to find the variable(s) with the best
relationship to past sales.
3. Although causal methods have measurable levels of accuracy, there are some
important caveats and limitations. The fact that demand and some causal
variables (independent variables) are correlated (associated) does not mean that
the independent variable “caused” sales. The independent variable should be
logically related to demand.
4. Regression methods require considerable historical data for equations to be
valid and reliable, but the data may not be available. Caution must always be
used in extrapolating relationships into the future. The equation relates what
has happened; economic and industry factors may change in the future, making
past relationships invalid.
5. A recent study on forecasting methods suggests choosing a methodology based
on the underlying behavior of the market rather than the time horizon of the
forecast.41 This research indicates that when markets are sensitive to changes
in market and environmental variables, causal methods work best, whether
the forecast is short or long range; time series approaches are more effective
when the market exhibits no sensitivity to market and/or environmental
changes.
CPFR: A New Collaborative Approach to Estimating Demand
CPFR, or Collaborative Planning Forecasting and Replenishment, is a unique approach to forecasting demand that involves the combined efforts of many functions
41 Robert J. Thomas, “Method and Situational Factors in Sales Forecast Accuracy,” Journal of Forecasting 12 (January
1993): p. 75.
146 Part III
Assessing Market Opportunities
within the firm as well as with partners in the supply chain. In this approach, one
individual in the firm is given the responsibility for coordinating the forecasting process with functional managers across the firm. So sales, marketing, production, logistics, and procurement personnel will be called upon to jointly discuss their plans for
the upcoming period. In this way, all the parties who may influence sales performance
will participate directly in the demand estimation process.
Once the firm has a good grasp internally of each function’s forthcoming strategies and plans, the “demand planner” from the firm will then reach out to customers,
distributors, and manufacturers’ representatives to assess what their marketing, promotion, and sales plans are for the product in question.
These plans are then shared with the company’s functional managers and
demand estimates are adjusted accordingly. The demand planner then develops
a final demand estimate for the coming period based on this wide array of input.
As one might expect, the CPFR approach to estimating demand often results
in a very accurate forecast of demand due to the intensive sharing of information among the firm’s functional managers and key supply chain and channel
partners.
The most practical approach for application of CPFR is for the trading partners
to map their partners’ forecasts into their own terms, understand where their partners’
plans deviate significantly from their own, and then collaborate on the assumptions
that may be leading to different estimates. Through this iterative process, intermediaries and manufacturers use collaborative feedback to synchronize their supply chains,
while keeping their enterprise planning processes intact.42
Combining Several Forecasting Techniques
Recent research on forecasting techniques indicates that forecasting accuracy can be
improved by combining the results of several forecasting methods.43 The results of
combined forecasts greatly surpass most individual projections, techniques, and analyses by experts. Mark Moriarty and Arthur Adams suggest that managers should use
a composite forecasting model that includes both systematic (quantitative) and judgmental (qualitative) factors.44 In fact, they suggest that a composite forecast be created
to provide a standard of comparison in evaluating the results provided by any single
forecasting approach. Each forecasting approach relies on varying data to derive sales
estimates. By considering a broader range of factors that affect sales, the combined
approach provides a more accurate forecast. Rather than searching for the single
“best” forecasting technique, business marketers should direct increased attention to
the composite forecasting approach.
42 “Taking It One Step at a Time: Tapping into the Benefits of Collaborative Planning, Forecasting, and Replenishment
(CPFR),” An Oracle White Pape, (August 2005), http://www.oracle.com/applications/retail/library/white-papers/takingit-one-step.pdf.
43 J. Scott Armstrong, “The Forecasting Canon: Nine Generalizations to Improve Forecast Accuracy,” FORESIGHT: The
International Journal of Applied Forecasting 1 (1, June 2005): pp. 29–35.
44 Moriarty and Adams, “Management Judgment Forecasts,” p. 248.
Chapter 5
Segmenting the Business Market and Estimating Segment Demand
147
Summary
The business market contains a complex mix of customers with diverse needs and
objectives. The marketing strategist who analyzes the aggregate market and identifies
neglected or inadequately served groups of buyers (segments) is ideally prepared for a
market assault. Specific marketing strategy adjustments can be made to fit the unique
needs of each target segment. Of course, such differentiated marketing strategies are
feasible only when the target segments are measurable, accessible, compatible, responsive, and large enough to justify separate attention.
Procedurally, business market segmentation involves categorizing actual or potential buying organizations into mutually exclusive clusters (segments), each of
which exhibits a relatively homogeneous response to marketing strategy variables. To
accomplish this task, the business marketer can draw upon two types of segmentation bases: macrolevel and microlevel. Macrodimensions are the key characteristics
of buying organizations and of the purchasing situation. The NAICS together with
other secondary sources of information are valuable in macrolevel segmentation. Microlevel bases of segmentation center on key characteristics of the decision-making
unit and require a higher level of market knowledge.
This chapter outlined a systematic approach for the business marketer to apply when
identifying and selecting target segments. Before a final decision is made, the marketer
must weigh the costs and benefits of a segmented marketing strategy. In developing a
market segmentation plan, the business marketing manager isolates the costs and revenues associated with serving particular market segments. By directing its resources to
its most profitable customers and segments, the business marketer is less vulnerable to
focused competitors that may seek to “cherry-pick” the firm’s most valuable customers.
The forecasting techniques available to the business marketer are (1) qualitative
and (2) quantitative. Qualitative techniques rely on informed judgments of future
sales and include executive judgment, the sales force composite, and the Delphi methods. By contrast, quantitative techniques have more complex data requirements and
include time series and causal approaches. The time series method uses chronological
historical data to project the future trend and growth rate of sales. Causal methods,
on the other hand, seek to identify factors that have affected past sales and to incorporate them into a mathematical model. The essence of sound demand forecasting is to
combine effectively the forecasts provided by various methods.
Discussion Questions
1. Cogent is a rapidly growing company that makes software which
identifies people using biometrics—fingerprints, faces, eyeballs, and
other personal characteristics. The firm is making terminals that
allow customers to pay for products with their fingerprints. Assess the
potential of the “pay by touch” system and suggest possible market
segments that might be receptive to the new offering.
2. Automatic Data Processing, Inc. (ADP), handles payroll and tax filing
processing for more than 300,000 customers. In other words, firms
outsource these functions to ADP. Suggest possible segmentation bases
that ADP might employ in this service market. What criteria would
be important to organizational buyers in making the decision to turn
payroll processing over to an outside firm?
148 Part III
Assessing Market Opportunities
3. FedEx believes that its future growth will come from business-tobusiness e-commerce transactions where customers demand quick and
reliable delivery service. Outline a segmentation plan that the firm might
use to become the market leader in this rapidly expanding area.
4. Sara Lee Corporation derives more than $1.5 billion of sales each
year from the institutional market (for example, hospitals, schools,
restaurants). Explain how a firm such as Sara Lee or General Mills might
apply the concept of market segmentation to the institutional market.
5. Some firms follow a single-stage segmentation approach using
macrodimensions; others use both macrodimensions and
microdimensions. As a business marketing manager, what factors would
you consider in making a choice between the two methods?
6. Compare and contrast the sales force composite and the Delphi methods
of developing a sales forecast.
7. Although qualitative forecasting techniques are important in the sales
forecasting process in many industrial firms, the marketing manager
must understand the limitations of these approaches. Outline these
limitations.
8. As alternative methods for demand forecasting, what is the underlying
logic of (1) time series and (2) regression or causal methods?
9. What limitations must be understood before applying and interpreting
the demand forecasting results generated by causal methods?
10. What features of the business market support the use of qualitative
forecasting approaches? What benefits does the business market analyst
gain by combining these qualitative approaches with quantitative
forecasting methods?
Internet Exercises
1. Xerox positions itself as “The Document Company” because the firm
provides solutions to help customers manage documents—paper,
electronic, online. Go to http://www.xerox.com, click on “Industry
Solutions,” and
a. Describe the industry sectors that the firm seems to cover in its
market segmentation plan.
b. Identify the particular product and service that Xerox has developed
for bank customers.
CASE
Federated Insurance: Targeting Small Businesses45
Targeting small and medium-sized business (SMB) customers, Federated Insurance
offers clients and prospects a program of complete insurance protection, covering the
spectrum from commercial property and casualty insurance and life and disability insurance to group health insurance. Since its founding over a century ago, the market
plan for the company has centered on a clear-cut strategy: provide the highest quality,
best-value service available to selected businesses.
Based in Owatonna, Minnesota, with regional offices in Atlanta and Phoenix,
Federated has 2,600 employees and operates in 48 states. Consistent with its heritage
and original market plan, the company specializes in business insurance for selected
industries:
• Auto dealers and auto parts wholesalers
• Building contractors (for example, electrical, plumbing-heating-cooling)
• Equipment dealers (for example, agricultural, lawn and garden)
• Funeral services
• Jewelers
• Machine shops
• Petroleum marketers and convenience stores
• Tire dealers
Cultivating Business Relationships
Marketing representatives at Federated can tailor insurance protection to meet virtually all of a business owner’s insurance needs: property, casualty, health, retirement,
and more. They also provide quality risk-management services that respond to the
specific needs of business owners. The goal here is to help customers develop procedures and practices that can reduce losses and improve worksite safety conditions.
Federated enjoys a strong reputation among SMB customers, as the following testimonials demonstrate:
“One of the things Federated does very well is that they have focus. It’s not
about selling insurance, it’s about taking care of your customers, and the businesses that do best are the ones that take care of their customers.”
[Tim Smith, President, Bob Smith BMW, Calabasas, California]
45 “About Federated: Our History and Mission,” accessed at http://www.federatedinsurance.com on July 10, 2008.
149
150 Part III
Assessing Market Opportunities
“I’ve had friends who are in businesses that jump insurance companies all the
time and they’re price shopping. They don’t realize the relationship that you
have to build with an insurance company. It’s such a close relationship, but yet
so secure. With Federated, we don’t worry—we don’t have to.”
[Greg Nesler, President, Rochester Plumbing and Heating, Rochester, Minnesota]
Discussion Questions
1. By directing attention to particular types of businesses (for example, convenience
stores or auto dealers), Federated emphasizes macrosegmentation. To further
sharpen strategy, suggest possible ways that particular macrosegments could be
broken down further into meaningful microsegments.
2. In buying insurance, some SMB customers just want the lowest-priced option for
each type of insurance, whereas others want value-added services (for example,
risk-management guidance) and a complete, integrated insurance solution. How
should Federated respond to customers who are strictly focused on price? In your
view, what are the points of difference that Federated should illuminate in the
customer value proposition?
PART
IV
FORMULATING BUSINESS
MARKETING STRATEGY
151
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CHAPTER
6
Business Marketing Planning:
Strategic Perspectives
To this point, you have developed an understanding of organizational buying behavior, customer relationship management, market segmentation, and a host of other
tools managers use. All of this provides a fundamentally important perspective to the
business marketing strategist. After reading this chapter, you will understand:
1. marketing’s strategic role in corporate strategy development.
2. the multifunctional nature of business marketing decision making.
3. the components of a business model that can be converted into superior
positions of advantage in the business market.
4. a valuable framework for detailing the processes and systems that drive
strategy success.
153
154 Part IV
Formulating Business Marketing Strategy
Most large corporations implicitly believe that strategy is the province of senior management. This is not so at GE Capital.1 At a recent planning session, someone suggested
that each of its 28 different businesses assemble a team of lower- to mid-level managers,
all under the age of 30, and give them the task of finding opportunities that their “older
managers” had missed. The young teams returned with a number of fresh ideas, including
several focused on how GE Capital could further capitalize on the Internet. New growth
strategies come from new ideas. New ideas often come from new voices. Drawing on the
collective strengths of the organization is what strategy formulation is all about.
To meet the challenges brought on by growing domestic and global competition,
business-to-business firms are increasingly recognizing the vital role of the marketing function in developing and implementing successful business strategies. Effective
business strategies share many common characteristics, but at a minimum they are
responsive to market needs, they exploit the special competencies of the organization,
and they use valid assumptions about environmental trends and competitive behavior. Above all, they must offer a realistic basis for securing and sustaining a competitive advantage.2 This chapter examines the nature and critical importance of strategy
development in the business marketing firm.
First, the chapter highlights the special role of the marketing function in corporate
strategy development, with a functionally integrated perspective of business marketing
planning. Next, it identifies the sources of competitive advantage by exploring the key
components of a business model and how they can be managed to secure distinctive
strategic positioning. Finally, a framework is offered for converting strategy goals into a
tightly integrated customer strategy. This discussion provides a foundation for exploring business marketing strategy on a global scale—the theme of the next chapter.
Marketing’s Strategic Role
Market-driven firms are centered on customers—they take an outside-in view of
strategy and demonstrate an ability to sense market trends ahead of their competitors.3 Many firms—like Johnson & Johnson, Motorola, and Dow Chemical—have
numerous divisions, product lines, products, and brands. Policies established at the
corporate level provide the framework for strategy development in each business division to ensure survival and growth of the entire enterprise. In turn, corporate and
divisional policies establish the boundaries within which individual product or market
managers develop strategy.
The Hierarchy of Strategies
Three major levels of strategy dominate most large multiproduct organizations:
(1) corporate strategy, (2) business-level strategy, and (3) functional strategy.4
1
Gary Hamel, “Bringing Silicon Valley Inside,” Harvard Business Review 77 (September–October 1999): pp. 78–79. See
also Gary Hamel, “The Why, What, and How of Management Innovation,” Harvard Business Review 84 (February 2006):
pp. 72–84.
2
Eric M. Olson, Stanley F. Slater, and G. Thomas M. Hult, “The Performance Implications of Fit among Business
Strategy, Marketing Organization Structure, and Strategic Behavior,” Journal of Marketing 69 (July 2005): pp. 49–65.
3
For a comprehensive review, see Ahmet H. Kirca, Satish Jayachandran, and William O. Bearden, “Market Orientation:
A Meta Analytic Review of Its Antecedents and Impact on Performance,” Journal of Marketing 69 (April 2005): pp. 24–41.
4
This discussion draws on Frederick E. Webster Jr., “The Changing Role of Marketing in the Corporation,” Journal of
Marketing 56 (October 1992): pp. 1–17.
Chapter 6
Business Marketing Planning: Strategic Perspectives
155
Corporate strategy defines the businesses in which a company competes, preferably in a manner that uses resources to convert distinctive competence into competitive
advantage. Essential questions at this level include: What are our core competencies?
What businesses are we in? What businesses should we be in? How should we allocate
resources across these businesses to achieve our overall organizational goals and objectives? At this level of strategy, the role of marketing is to (1) assess market attractiveness
and the competitive effectiveness of the firm, (2) promote a customer orientation to
the various constituencies in management decision making, and (3) formulate the firm’s
overall value proposition (as a reflection of its distinctive competencies, in terms reflecting customer needs) and to articulate it to the market and to the organization at large.
According to Frederick Webster Jr., “At the corporate level, marketing managers have a
critical role to play as advocates, for the customer and for a set of values and beliefs that
put the customer first in the firm’s decision making.”5
Business-level strategy centers on how a firm competes in a given industry and
positions itself against its competitors. The focus of competition is not between corporations; rather, it is between their individual business units. A strategic business
unit (SBU ) is a single business or collection of businesses that has a distinct mission,
a responsible manager, and its own competitors and that is relatively independent of
other business units. The 3M Corporation has defined 40 strategic business units.
Each develops a plan describing how it will manage its mix of products to secure a
competitive advantage consistent with the level of investment and risk that management is willing to accept. An SBU could be one or more divisions of the industrial
firm, a product line within one division, or, on occasion, a single product. Strategic
business units may share resources such as a sales force with other business units to
achieve economies of scale. An SBU may serve one or many product-market units.
For each business unit in the corporate portfolio, the following essential questions must be answered: How can we compete most effectively for the product market
the business unit serves? What distinctive skills can give the business unit a competitive advantage? Similarly, the former CEO at GE, Jack Welch, asks his operating
executives to crisply answer the following questions6:
• Describe the global competitive environment in which you operate.
• In the last two years, what have your competitors done?
• In the same period, what have you done to them in the marketplace?
• How might they attack you in the future?
• What are your plans to leapfrog them?
The marketing function contributes to the planning process at this level by providing
a detailed and complete analysis of customers and competitors and the firm’s distinctive skills and resources for competing in particular market segments.
Functional strategy centers on how resources allocated to the various functional areas can be used most efficiently and effectively to support the business-level
strategy. The primary focus of marketing strategy at this level is to allocate and coordinate
5
6
Ibid.; Webster, “The Changing Role of Marketing,” p. 11.
Noel M. Tichy and Stratford Sherman, Control Your Destiny or Someone Else Will (New York: Doubleday, 1993), p. 26;
see also Jack Welch and John A. Byrne, Jack: Straight from the Gut (New York: Warner Books, 2001).
156 Part IV
Formulating Business Marketing Strategy
marketing resources and activities to achieve the firm’s objective within a specific
product market.
Strategy Formulation and the Hierarchy7
The interplay among the three levels of the strategy hierarchy can be illustrated by examining the collective action perspective of strategy formulation. This approach applies
to strategic decisions that (1) cut across functional areas, (2) involve issues related to the
organization’s long-term objectives, or (3) involve allocating resources across business
units or product markets. Included here are decisions about the direction of corporate
strategy, the application of a core technology, or the choice of an alliance partner.
Observe in Figure 6.1 that strategic decision processes often involve the active
participation of several functional interest groups that hold markedly different beliefs
about the appropriateness of particular strategies or corporate goals. Strategic decisions represent the outcome of a bargaining process among functional interest groups
(including marketing), each of which may interpret the proposed strategy in an entirely different light.
Turf Issues and Thought-World Views Two forces contribute to the conflict that
often divides participants in the strategy formulation process. First, different meanings assigned to a proposed strategy are often motivated by deeper differences in what might be
called “organizational subcultures.” Subcultures exist when one subunit shares different
values, beliefs, and goals than another subunit, resulting in different thought-worlds.8
For example, marketing managers are concerned with market opportunities and competitors, whereas R&D managers value technical sophistication and innovation. Second,
functional managers are likely to resist strategic changes that threaten their turf. To the
extent that the subunit defines the individual’s identity and connotes prestige and power,
the organizational member may be reluctant to see it altered by a strategic decision.
Negotiated Outcomes Collective decisions emerge from negotiation and compromise among partisan participants. The differences in goals, thought-worlds, and
self-interests across participants lead to conflicts about actions that should be taken.
Choices must be negotiated with each interest group attempting to achieve its own
ends. The ultimate outcomes of collective decisions tend to unfold incrementally and
depend more on the partisan values and influence of the various interest groups than
on rational analysis. A study of highly contested strategic decision in a Fortune 500
company illustrates the tension that may exist between marketing and R&D.
Two marketing executives describe how the decision was ultimately resolved.9
According to the marketing manager:
[Marketing] did an extremely effective job of stepping right in the middle of
it and strangling it. . . . What has happened is by laying out the market unit
7
Gary L. Frankwick, James C. Ward, Michael D. Hutt, and Peter H. Reingen, “Evolving Patterns of Organizational Beliefs
in the Formation of Marketing Strategy,” Journal of Marketing 58 (April 1994): pp. 96–110; see also Michael D. Hutt, Beth
A. Walker, and Gary L. Frankwick, “Hurdle the Cross-Functional Barriers to Strategic Change,” Sloan Management Review
36 (Spring 1995): pp. 22–30.
8
See, for example, Christian Homburg, Ore Jensen, and Harley Krohmer, “Configurations of Marketing and Sales,” Journal
of Marketing 72 (March 2008): pp. 123–154; and Christian Homburg and Ore Jensen, “The Thought Worlds of Marketing
and Sales: Which Differences Make a Difference?” Journal of Marketing 71 (July 2007): pp. 124–141.
9
Frankwick, Ward, Hutt, and Reingen, “Evolving Patterns of Organizational Beliefs,” pp. 107–108.
Chapter 6
Select Strategic
Option and
Negotiate Objectives
Communicate Guidelines
for Strategic Decision
Negotiate and Establish
Evaluate Strategic
B
U
S
I
N
E
S
S
Preliminary Objectives
Options
F
U
N
C
T
I
O
N
Situation Analysis
Negotiate and
and Review of Current
Strategy
Develop Strategic
Options
OU
T
W
S
LD
OR
GH
Communicate
Strategy and
Functional
Objectives
TH
157
A COLLECTIVE ACTION PERSPECTIVE OF THE STRATEGY FORMULATION PROCESS
FIGURE 6.1
C
O
R
P
O
R
A
T
E
Business Marketing Planning: Strategic Perspectives
Marketing
R&D
Manufacturing
Other
Interpret Meaning of
Strategic Change to
Functional Interest
Group
Integrate
Functional
Plans
Negotiate and
Develop
Functional Plans
TURF
SOURCE: Gary L. Frankwick, James C. Ward, Michael D. Hutt, and Peter H. Reingen, “Evolving Patterns of Organizational Beliefs in the
Formation of Strategy,” Journal of Marketing 58 (April 1994): p. 98. Reprinted with permission by the American Marketing Association.
concerns and again, refocusing on the fact that we are market-based, basically
what Marketing did was force the R&D team into submission where they no
longer have the autonomy they once had to go about making decisions—they
now get input. And whether it’s formal or informal, they definitely get the
buy-in of marketing before they move forward on what they’re doing now.
According to the vice president of marketing:
Before I felt it was technology driving the process. Now I feel that technology
is partnering with the marketplace. And the reason I feel that way is because
we have [marketing people] in place that are working closely with how the
technology develops.
158 Part IV
Formulating Business Marketing Strategy
INSIDE BUSINESS MARKETING
From Bullet-Point Plans to Strategic Stories at 3M
After reviewing countless business plans over
several years, Gordon Shaw, executive director of
planning at 3M, concluded that the firm’s business
plans failed to reflect deep thought or to inspire
commitment and active support. He suspected that
the traditional, bullet-list format of the plans was
a major part of the problem. Bullet lists are too
generic and fail to convey how the business will win
in a particular market. To remedy the problem, he
turned to strategic narratives—planning through
storytelling. Like a good story, a good strategic
plan “defines relationships, cause and effect, and a
priority among items—and those elements are likely
to be remembered as a complex whole.”
In using the approach, a strategist at 3M first
sets the stage by defining the current competitive,
market, and company situation in an insightful and
coherent manner. Next, the planner must introduce
the dramatic conflict—the main challenges or
critical issues that provide obstacles to success. Finally,
the story must reach resolution in a satisfying
and compelling fashion. Here a logical and concise
argument is provided concerning the specific actions
the company can take to overcome the obstacles and
win. Narrative plans create a rich picture of strategy,
bring critical assumptions to the surface, and provide
a central message that can motivate and mobilize
employees throughout the organization.
SOURCE: Gordon Shaw, Robert Brown, and Philip Bromley,
“Strategic Stories: How 3M Is Rewriting Business Planning,”
Harvard Business Review 76 (May/June 1998): pp. 41–50. See also,
David J. Collins and Michael G. Rukstad, “Can You Say What Your
Strategy Is?” Harvard Business Review 86 (April 2008): pp. 82–89.
Implications for Marketing Managers In advocating a strategic course, marketing managers must be sensitive to the likely response it may arouse in other interest
groups. To build pockets of commitment and trust, managers should develop and use a
communication network that includes organizational members who have a major stake
in the decision. Marketing managers can use these personal networks to understand
the interests of other stakeholders, communicate their own interests clearly and sensitively, and thus diffuse the anxiety of others about threats to their turf.
Functionally Integrated Planning: The Marketing Strategy Center10
Rather than operating in isolation from other functional areas, the successful business
marketing manager is an integrator—one who understands the capabilities of manufacturing, R&D, and customer service and who capitalizes on their strengths in developing marketing strategies that are responsive to customer needs. Marketing managers
also assume a central role in strategy implementation.11 Recent research indicates that
in companies found to be strong on strategy execution, over 70 percent of employees
affirm that they have a clear idea of the decisions and actions for which they are responsible; that figure drops to 32 percent in organizations weak on execution.12
10
Michael D. Hutt and Thomas W. Speh, “The Marketing Strategy Center: Diagnosing the Industrial Marketer’s Interdisciplinary Role,” Journal of Marketing 48 (Fall 1984): pp. 53–61; see also Jeen-Su Lim and David A. Reid, “Vital CrossFunctional Linkages with Marketing,” Industrial Marketing Management 22 (February 1993): pp. 159–165.
11
Charles H. Noble and Michael P. Mokwa, “Implementing Marketing Strategies: Developing and Testing a Managerial
Theory,” Journal of Marketing, 63 (October 1999): pp. 57–73.
12Gary L. Neilson, Karla L. Martin, and Elizabeth Powers, “The Secrets to Successful Strategy Execution,” Harvard Business
Review 86 (June 2008): p. 63.
Chapter 6
Business Marketing Planning: Strategic Perspectives
159
B2B TOP PERFORMERS
Cross-Functional Relationships: Effective Managers
Deliver on Promises
Ask an R&D manager to identify a colleague from
marketing who is particularly effective at getting
things done and he or she readily offers a name and
a memorable episode to justify the selection. To
explore the characteristics of high-performing crossfunctional managers, detailed accounts of effective and
ineffective interactions were gathered from managers
at a Fortune 100 high-technology firm. Interestingly,
the top-of-mind characteristics that colleagues
emphasize when describing high performers are soft
skills like openness rather than hard skills like technical
proficiency or marketing savvy. Here’s a profile:
• High-performing managers are revered by their
colleagues for their responsiveness. Remembering
effective cross-functional episodes, colleagues
describe high performers as “timely,” “prompt,”
and “responsive” (for example, “When I need
critical information, I turn to him and he gets
right back to me”).
• Rather than a “functional mindset,” high
performers demonstrate perspective-taking skills—
the ability to anticipate and understand the
perspectives and priorities of managers from other
units (for example, “He’s a superb marketing
strategist but he also recognizes the special
technical issues that we’ve been working through
to get this product launched on schedule”).
• When colleagues describe the communication
style of their high-performing cross-functional
counterparts, they focus on three consistent
themes: openness, frequency, and quality.
Interactions with high performers are described
as “candid,” “unencumbered,” and characterized
by a “free flow of thoughts and suggestions.”
Such high-quality interactions clarify goals and
responsibilities.
By “delivering on their promises,” effective
managers develop a web of close relationships
across functions. “He has really good personal
relationships with a lot of people and he has a
network—he really understands the mechanisms
that you have to use to get things done.”
SOURCE: Michael D. Hutt, Beth A. Walker, Edward U. Bond
III, and Matthew Meuter, “Diagnosing Marketing Managers’
Effective and Ineffective Cross-Functional Interactions,”
working paper, Tempe, Ariz.: Arizona State University, 2005.
See also Edward U. Bond III, Beth A. Walker, Michael D. Hutt,
and Peter H. Reingen, “Reputational Effectiveness in CrossFunctional Working Relationships,” Journal of Product Innovation
Management 21 ( January 2004): pp. 44–60.
Responsibility charting is an approach that can classify decision-making roles
and highlight the multifunctional nature of business marketing decision making.
Table 6.1 provides the structure of a responsibility chart. The decision areas (rows)
in the matrix might, for example, relate to a planned product-line expansion. The various functional areas that may assume particular roles in this decision process head
the matrix columns. The following list defines the alternative roles that participants
can assume in the decision-making process.13
1. Responsible (R): The manager takes initiative for analyzing the situation,
developing alternatives, and assuring consultation with others and then makes
the initial recommendation. Upon approval of decision, the role ends.
2. Approve (A): The manager accepts or vetoes a decision before it is implemented
or chooses from alternatives developed by the participants assuming a
“responsible” role.
13
Joseph E. McCann and Thomas N. Gilmore, “Diagnosing Organizational Decision Making through Responsibility
Charting,” Sloan Management Review 25 (Winter 1983): pp. 3–15.
160 Part IV
Formulating Business Marketing Strategy
3. Consult (C): The manager is consulted or asked for substantive input before the
decision is approved but does not possess veto power.
4. Implement (M): The manager is accountable for implementing the decision,
including notifying other relevant participants about the decision.
5. Inform (I): Although not necessarily consulted before the decision is approved,
the manager is informed of the decision once it is made.
Representatives of a particular functional area may, of course, assume more than
one role in the decision-making process. The technical service manager may be consulted during the new-product-development process and may also be held accountable for implementing service-support strategy. Likewise, the marketing manager
may be responsible for and approve many of the decisions related to the product-line
expansion. For other actions, several decision makers may participate. To illustrate,
the business unit manager, after consulting R&D, may approve (or veto) a decision
for which the marketing manager is responsible.
The members of the organization involved in the business marketing decision-making
process constitute the marketing strategy center. The composition or functional area
representation of the strategy center evolves during the marketing strategy development
process, varies from firm to firm, and varies from one situation to another. Likewise, the
composition of the marketing strategy center is not strictly prescribed by the organizational
chart. The needs of a particular strategy situation, especially the information requirements,
significantly influence the composition of the strategy center. Thus, the marketing strategy
center shares certain parallels with the buying center (see Chapter 3).
Managing Strategic Interdependencies A central challenge for the business marketer in the strategy center is to minimize interdepartmental conflict while fostering
shared appreciation of the interdependencies with other functional units. Individual
strategy center participants are motivated by both personal and organizational goals.
They interpret company objectives in relation to their level in the hierarchy and the department they represent. Various functional units operate under unique reward systems
and reflect unique orientations or thought-worlds. For example, marketing managers are
evaluated on the basis of sales, profits, or market share; production managers on the basis
of manufacturing efficiency and cost-effectiveness. In turn, R&D managers may be oriented toward long-term objectives; customer service managers may emphasize more immediate ones. Strategic plans emerge out of a bargaining process among functional areas.
Managing conflict, promoting cooperation, and developing coordinated strategies are all
fundamental to the business marketer’s interdisciplinary role. By understanding the concerns and orientations of personnel from other functional areas, the business marketing
manager is better equipped to forge effective cross-unit working relationships.
The Components of a Business Model14
For a strategy to succeed, individuals must understand and share a common definition
of a firm’s existing business concept. For example, ask any employee at Dell and they
14
Except where noted, this discussion is based on Gary Hamel, Leading the Revolution (Boston: Harvard Business School
Press, 2000), pp. 70–94.
Chapter 6
TABLE 6.1
Business Marketing Planning: Strategic Perspectives
161
INTERFUNCTIONAL INVOLVEMENT IN MARKETING DECISION MAKING:
AN ILLUSTRATIVE RESPONSIBILITY CHART
Organizational Function
Decision
Area
Marketing Manufacturing
R&D
Logistics
Technical
Service
Strategic
Business
Unit
Manager
Corporate
Level
Planner
PRODUCT
Design
specifications
Performance
characteristics
Reliability
PRICE
List price
Discount structure
TECHNICAL SERVICE
SUPPORT
Customer
training
Repair
LOGISTICS
Inventory level
Customer service
level
SALES FORCE
Training
ADVERTISING
Message
development
CHANNEL
Selection
NOTE: Decision role vocabulary: R 5 responsible; A 5 approve; C 5 consult; M 5 implement; I 5 inform; X 5 no role in decision.
162 Part IV
Formulating Business Marketing Strategy
COMPONENTS OF A BUSINESS MODEL
FIGURE 6.2
Configuration
Customer Benefits
Company Boundaries
Customer Interface
Core Strategy
Strategic Resources
Value Network
Fullfillment & Support
Information & Insight
Relationship Dynamics
Pricing Structure
Business Mission
Product/Market Scope
Basis for Differentiation
Core Competencies
Strategic Assets
Core Processes
Suppliers
Partners
Coalitions
SOURCE: Reprinted by permission of Harvard Business Review. From “Customer Benefits, Configuration and Boundaries” in Leading
the Revolution by Gary Hamel, p. 96. Copyright © 2000 by the Harvard Business School Publishing Corporation; all rights reserved.
will tell you about the “Dell model” that sets them apart from competitors. A business concept or model consists of four major components (Figure 6.2):
• Customer Interface
• Core Strategy
• Strategic Resources
• Value Network
The major components of the business concept are tied together by three important
“bridge” elements: customer benefits, configuration, and company boundaries.
Customer Interface
Customer benefits provide the bridge between the core strategy and the customer
interface. Customer benefits link the core strategy directly to the needs of customers.
The customer interface includes four elements:
1. Fulfillment and support refers to the channels a business marketing firm uses
to reach customers and the level of service support it provides.
2. Information and insight refers to the knowledge captured from customers
and the degree to which this information is used to provide enhanced value to
the customer.
3. Relationship dynamics refers to the nature of the interaction between the firm
and its customers (for example, the proportion of relational versus transactional
customers; see Chapter 4). Key question: What steps can be taken to raise the
hurdle for competitors by exceeding customer expectations or strengthening
the customer’s sense of affiliation with the firm?
4. Pricing structure. A business concept may offer several pricing choices. For
example, a firm can bundle products and services or price them on a menu basis.
Chapter 6
Business Marketing Planning: Strategic Perspectives
163
For example, when airlines buy a Boeing 777, which is equipped with jet engines
produced by GE, they pay GE a fee for each flight hour in line with a fixedpriced maintenance agreement. So, rather than products, GE is selling “power
by the hour.”
Core Strategy
The core strategy determines how the firm chooses to compete. From Figure 6.2,
observe that three elements are involved in setting a core strategy:
1. The business mission describes the overall objectives of the strategy, sets a
course and direction, and defines a set of performance criteria that are used
to measure progress. The business mission must be broad enough to allow for
business concept innovation, and it should be distinguished from the mission
of competitors in the industry. For example, by focusing its mission on copiers
and copying, Xerox allowed Hewlett-Packard to build a dominant lead in the
printer business.
2. Product /market scope defines where the firm competes. The product markets
that constitute the domain of a business can be defined by customer benefits,
technologies, customer segments, and channels of distribution.15 Strategists
might consider this question: Are particular customer segments being
overlooked by competitors or customers who might welcome a new productservice solution?
3. Basis for differentiation captures the essence of how a firm competes
differently than its rivals. George Day and Robin Wensley explain:
A business is differentiated when some value-adding activities are performed
in a way that leads to perceived superiority along dimensions that are valued
by customers. For these activities to be profitable, the customer must be
willing to pay a premium for the benefits and the premium must exceed the
added costs of superior performance.16
There are many ways for a firm to differentiate products and services:
• Provide superior service or technical assistance competence through speed,
responsiveness to complex orders, or ability to solve special customer
problems.
• Provide superior quality that reduces customer costs or improves their
performance.
• Offer innovative product features that use new technologies.
15
George S. Day, Strategic Market Planning: The Pursuit of Competitive Advantage (St. Paul, MN: West Publishing,
1984).
16
George S. Day and Robin Wensley, “Assessing Advantage: A Framework for Diagnosing Competitive Superiority,” Journal
of Marketing 52 (April 1988): pp. 3–4. See also Douglas W. Vorhies and Neil A. Morgan, “Benchmarking Marketing Capabilities for Sustainable Competitive Advantage,” Journal of Marketing 69 ( January 2005): pp. 80–94.
164 Part IV
Formulating Business Marketing Strategy
Strategic Resources
A business marketing firm gains a competitive advantage through its superior skills
and resources. The firm’s strategic resources include core competencies, strategic assets, and core processes.
1. Core competencies are the set of skills, systems, and technologies a company
uses to create uniquely high value for customers.17 For example, Dell uses its
direct-distribution competencies to sell a host of new products to corporate
customers, including switches, servers, storage, and a range of peripheral
products.18 Concerning core competencies, the guiding questions for the
strategist are: What important benefits do our competencies provide to
customers? What do we know or do especially well that is valuable to customers
and is transferable to new market opportunities?
2. Strategic assets are the more tangible requirements for advantage that
enable a firm to exercise its capabilities. Included are brands, customer data,
distribution coverage, patents, and other resources that are both rare and
valuable. Attention centers on this question: Can we use these strategic assets
in a different way to provide new levels of value to existing or prospective
customers?
3. Core processes are the methodologies and routines companies use to
transform competencies, assets, and other inputs into value for customers. For
example, drug discovery is a core process at Merck, and delivery fulfillment is
a core process at FedEx. Here the strategist considers these questions: Which
processes are most competitively unique and create the most customer value?
Could we use our process expertise effectively to enter other markets?
From Figure 6.2, note that a configuration component links strategic resources to
the core strategy. “Configuration refers to the unique way in which competencies, assets, and processes are interrelated in support of a particular strategy.”19 For example,
Honda manages key activities in the new-product-development process differently
than its rivals.
The Value Network
The final component of a business concept is the value network that complements
and further enriches the firm’s research base. Included here are suppliers, strategic
alliance partners, and coalitions. To illustrate, nimble competitors like Cisco and
General Electric demonstrate special skills in forging relationships with suppliers and
alliance partners. Concerning the value network, the guiding question for the strategist is: What market opportunities might become available to us “if we could ‘borrow’
the assets and competencies of other companies and marry them with our own?”20
17
James Brian Quinn, “Strategic Outsourcing: Leveraging Knowledge Capabilities,” Sloan Management Review 40 (Summer
1999): pp. 9–21.
18
Andy Serwer, “Dell Does Domination,” Fortune, January 21, 2002, pp. 70–75.
19
Hamel, Leading the Revolution, p. 78.
20
Ibid., p. 90.
Chapter 6
FIGURE 6.3
Business Marketing Planning: Strategic Perspectives
165
THE PRINCIPLES OF STRATEGIC POSITIONING
Right Goal: Profitability
Unique Value proposition
Strategic
Positioning
Distinctive Value Chain
Trade-Offs
Fit: Mutually-Reinforcing Activities
Continuity of Direction
SOURCE: Adapted from Michael E. Porter, “What Is Strategy?” Harvard Business Review 74 (November–December
1996): pp. 61–78.
Strategic Positioning21
Competitive strategy, at the core, is about being different, choosing to compete in a
distinctive way. A business model should reveal the way in which a firm is deliberately
emphasizing a different set of activities in order to deliver a unique mix of customer
value. Michael Porter asserts that six fundamental principles provide a company with
the foundation for establishing and maintaining a distinctive strategic positioning (see
Figure 6.3).
• Center on the right goal—superior long-term return on investment rather than
performance goals defined in terms of sales volume or market share leadership.
• Deliver a customer value proposition, or set of benefits, that differs from those of
rivals. (For example, Southwest Airlines delivers low-cost, convenient service to
customers—particular benefits that full-service rivals cannot match.)
• Create a distinctive value chain by performing different activities than rivals or
performing similar activities in different ways. (For example, by streamlining
the passenger boarding process, Southwest achieves faster turnaround at the
gate and can provide more frequent departures with fewer planes.)
21
This section is based on Michael E. Porter, “What Is Strategy?” Harvard Business Review 74 (November–December 1996):
pp. 61–78.
166 Part IV
Formulating Business Marketing Strategy
• Accept trade-offs and recognize that a company must forgo some product features or services to remain truly distinctive in others. (For example, Continental
Airlines introduced Continental Lite to compete directly against Southwest. By
trying to be low cost on some routes and full service on others, Continental lost
several hundred million dollars before grounding Continental Lite.)
• Emphasize the way in which all the elements of the strategy fit and reinforce one
another. (For example, from its standardized fleet of Boeing 737 aircraft to its
well-trained ground crews that speed flight turnaround, and its strict limits on
the type and length of routes, Southwest’s activities complement and reinforce
one another, creating a whole system of competing that locks out imitators.)
• Build strong customer relationships and develop unique skills by defining a
distinctive value proposition that provides continuity of direction. (For example,
Southwest continues to pursue its disciplined strategic agenda.)
Michael Porter observes:
Having a strategy is a matter of discipline. It requires a strong focus on profitability rather than just growth, an ability to define a unique value proposition,
and a willingness to make tough trade-offs in choosing what not to do. . . . It
involves the configuration of a tailored value chain—the series of activities
required to produce and deliver a product or service—that enables a company
to offer unique value.22
Let’s examine how a business-to-business firm has used these principles to establish
and maintain a distinctive strategic positioning.
Strategic Positioning Illustrated 23
Paccar operates in the fiercely competitive heavy-duty truck industry, designing and
manufacturing trucks under the Kenworth and Peterbilt brand names. The firm,
headquartered in Bellevue, Washington, commands 20 percent of the North American heavy truck market and derives approximately half of its revenues and profits from
outside the United States.
A Unique Focus Rather than centering on large-fleet buyers or large leasing companies, Paccar has chosen to focus on one group of customers—drivers who own their
own trucks and contract directly with shippers or serve as contractors to larger trucking companies. Paccar provides an array of specialized services that specifically address the needs of owner-operators: luxurious sleeper cabins, noise-insulated cabins,
and sleek interior and exterior options (numbering in the thousands) that prospective buyers can select to put their personal signatures on their trucks. Paccar delivers
its products and services to customers through an extensive dealer network of nearly
1,800 locations worldwide.
22Michael E. Porter, “Strategy and the Internet,” Harvard Business Review 79 (March 2001): p. 72.
23This illustration is based on Michael E. Porter, “The Five Competitive Forces that Shape Strategy,” Harvard Business
Review 86 ( January 2008): p. 89.
Chapter 6
Business Marketing Planning: Strategic Perspectives
167
Distinctive Value Proposition Built to order, these customized trucks are delivered to customers in six to eight weeks and incorporate features and value-added services that are embraced by owner-operators. Paccar’s trucks feature an aerodynamic
design that reduces fuel consumption and they maintain resale value better than the
trucks offered by rivals. To reduce out-of-service time, Paccar offers a comprehensive
roadside assistance program and an information-technology-supported system for expediting and delivering spare parts. According to Michael Porter, “Customers pay
Paccar a 10 percent premium, and its Kenworth and Peterbilt brands are considered
status symbols at truck stops.”24 Moreover, Paccar has received recognition for consistently leading the heavy-duty truck market in quality, innovation, and customer
satisfaction.25
By configuring its activities on new product development, manufacturing,
and service support differently from rivals, and by tailoring these activities to its
customer value proposition, Paccar has achieved an enviable record of financial performance: 68 straight years of profitability, averaging a long-run return on equity above
20 percent.
Building the Strategy Plan
By finding an intricate match between strategy and operations, strategic positioning
depends on doing many things well—not just a few. But yet, most companies’ underperformance is caused by breakdowns between strategy and operations. Robert
S. Kaplan and David P. Norton contend that successful strategy execution involves
two basic rules: “understand the management cycle that links strategy and operations,
and know what tools to apply at each stage of the cycle.”26 To that end, they propose
that companies develop a management system to plan, coordinate, and monitor the
links between strategy and operations. This management system represents “the integrated set of processes and tools that a company uses to develop its strategy, translate it into operational actions, and monitor and improve the effectiveness of both.”27
(See Figure 6.4.)
Observe that the management system involves five stages, beginning with strategy development (Stage 1) and then moving on to the crucial stage of translating
the strategy (Stage 2) into objectives and measures that can be clearly communicated
to all functional areas and employees. We will give special attention to two tools:
(1) the balanced scorecard that provides managers with a comprehensive system for
converting a company’s vision and strategy into a tightly connected set of performance measures; and (2) the strategy map—a tool for visualizing a firm’s strategy as
a chain of cause-and-effect relationships among strategic objectives. These tools and
processes assume a central role in designing key processes (Stage 3), monitoring performance (Stage 4), and adapting the strategy (Stage 5).
24Ibid.
25“Kenworth Wins J.D. Power Awards,” August 27, 2007, accessed at http://www.paccar.com/company/jdpower on July 11,
2008.
26Robert S. Kaplan and David P. Norton, “Mastering the Management System,” Harvard Business Review 86 (January 2008):
p. 63.
27Ibid., p. 64.
168 Part IV
Formulating Business Marketing Strategy
FIGURE 6.4
THE MANAGEMENT SYSTEM: LINKING STRATEGY AND OPERATIONS
Develop the Strategy
Stage 1
Define Mission, Vision, and
Values
Conduct Strategic Analysis
Translate the Strategy
Stage 2
Formulate Strategy
Test and Adapt the Strategy
Define Strategic Objectives
and themes
Stage 5
Examine Emerging Strategies
Select measures and targets
Select Strategic initiatives
Plan Operations
Stage 3
Conduct Profitablity Analysis
Monitor and Learn
Stage 4
Improve Key Processes
Develop Sales Plan
Prepare Budgets
Hold Strategy Reviews
Hold Operational Reviews
Execute Processes
and Initiatives
SOURCE: Adapted with modifications from Robert S. Kaplan and David P. Norton, “Mastering the Management System,”
Harvard Business Review 86 ( January 2008): p. 65.
The Balanced Scorecard 28
Measurement is a central element in the strategy process. The balanced scorecard
combines financial measures of past performance with measures of the drivers of performance. Observe in Figure 6.5 that the scorecard examines the performance of a
business unit from four perspectives: (1) financial, (2) customer, (3) internal business
processes, and (4) learning and growth.
The architects of the approach, Robert Kaplan and David Norton, emphasize
that “the scorecard should tell the story of the strategy, starting with the long-run
financial objectives, and then linking them to the sequence of actions that must be
taken with financial processes, customers, and finally employees and systems to deliver the desired long-run economic performance.”29
Financial Perspective
Financial performance measures allow business marketing managers to monitor the degree to which the firm’s strategy, implementation, and execution are increasing profits.
28
Except where noted, this discussion is based on Robert S. Kaplan and David P. Norton, Strategy Maps: Converting Intangible
Assets into Tangible Outcomes (Boston: Harvard Business School Publishing Corporation, 2004). See also Robert S. Kaplan
and David P. Norton, The Balanced Scorecard: Translating Strategy into Action (Boston: Harvard Business School Press, 1996),
chaps. 1–3.
29
Kaplan and Norton, The Balanced Scorecard, p. 47.
Chapter 6
Business Marketing Planning: Strategic Perspectives
169
THE BALANCED SCORECARD: A FRAMEWORK TO TRANSLATE A STRATEGY
INTO OPERATIONAL TERMS
FIGURE 6.5
Financial Perspective
Cause-and-Effect Relationships
Long-Term
Shareholder
Value
Productivity
Revenue
Growth
Defines the chain of logic by which intangible
assets will be transformed to tangible value.
Customer Perspective
Product/Service Attributes
Price
Quality
Time
Function
Relationship
Image
Partnership
Brand
Customer Value Proposition
Clarifies the conditions that will create value for
the customer.
Internal Process Perspective
Manage
Operations
Manage
Customers
Manage
Regulatory
and Social
Processes
Manage
Innovation
Learning and Growth Perspective
Human
Capital
+
Information
Capital
Value-Creating Processes
Defines the processes that will transform intangible
assets into customer and financial outcomes.
Clustering of Assets and Activities
+
Organization
Capital
Defines the intangible assets that must be
aligned and integrated to create the value.
SOURCE: Reprinted by permission of Harvard Business Review. From “Balanced Scorecard Framework” by Robert S. Kaplan in Strategy Maps, p. 31.
Copyright © 2004 by the Harvard Business School Publishing Corporation; all rights reserved.
Measures such as return on investment, revenue growth, shareholder value, profitability,
and cost per unit are among the performance measures that show whether the firm’s strategy is succeeding or failing. Companies emphasize two basic levers in developing a financial strategy: revenue growth and productivity.30 The revenue-growth strategy centers on
securing sales from new markets and new products or strengthening and expanding relationships with existing customers. The productivity strategy can also take two forms: improve the company’s cost structure by reducing expenses and/or use assets more efficiently
by decreasing the working and fixed capital needed to support a given level of output.
The balanced scorecard seeks to match financial objectives to a business unit’s
growth and life cycle stages. Three stages of a business are isolated and linked to
appropriate financial objectives:
1. Growth: Business units that have products and services with significant growth
potential and that must commit considerable resources (for example, production
facilities and distribution networks) to capitalize on the market opportunity.
30
Robert S. Kaplan and David P. Norton, “Having Trouble with Your Strategy? Then Map It,” Harvard Business Review
78 (September–October 2000): pp. 167–176.
170 Part IV
Formulating Business Marketing Strategy
Financial Objectives: Sales growth rate by segment; percentage of revenue from
new product, services, and customers.
2. Sustain: Business units, likely representing the majority of businesses within a
firm, that expect to maintain or to perhaps moderately increase market share
from year to year.
Financial Objectives: Share of target customers and accounts; customer and
product-line profitability.
3. Harvest: Mature business units that warrant only enough investment to
maintain production equipment and capabilities.
Financial Objectives: Payback; customer and product-line profitability.
Customer Perspective
In the customer component of the balanced scorecard, the business unit identifies the
market segments it will target (see Chapter 5). Those segments supply the revenue
stream that support critical financial objectives. Marketing managers must also identify the value proposition—how the firm proposes to deliver competitively superior and
sustainable value to the target customers and market segments. The central element of
any business strategy is the value proposition that describes a company’s unique product and service attributes, customer relationship management practices, and corporate
reputation. Importantly, the value proposition should clearly communicate to targeted
customers what the company expects to do better and differently than its competitors.
Key Value Propositions and Customer Strategies Business-to-business firms typically choose among four forms of differentiation in developing a value proposition31:
• Low total cost—customers are offered attractive prices, excellent and consistent quality, ease of purchase, and responsive service (for example, Dell, Inc.).
• Product innovation and leadership—customers receive products that expand
existing performance boundaries through new features and functions (for example, Intel and Sony).
• Complete customer solutions—customers feel that the company understands
them and can provide customized products and services tailored to their unique
requirements (for example, IBM).
• Lock-in—customers purchase a widely used proprietary product or service
from the firm and incur high switching costs (for example, Microsoft’s operating system, Cisco’s infrastructure products, or Google’s search engine).
For the chosen strategy, Table 6.2 presents the core customer outcome measures
used to monitor performance in each target segment. The customer perspective complements traditional market share analysis by tracking customer acquisition, customer
retention, customer satisfaction, and customer profitability.
31
Kaplan and Norton, Strategy Maps, pp. 322–344.
Chapter 6
TABLE 6.2
Business Marketing Planning: Strategic Perspectives
171
THE CUSTOMER PERSPECTIVE—CORE MEASURES
Market Share
Customer Acquisition
Customer Retention
Customer Satisfaction
Customer Profitability
Represents the proportion of business in a given market (in terms
of number of customers, dollars spent, or unit volume sold) that a
business unit sells.
Tracks, in absolute or relative terms, the rate at which a business
unit attracts or wins new customers or business.
Tracks, in absolute or relative terms, the rate at which a business
unit retains customers.
Matches the satisfaction level of customers on specific performance
criteria such as quality, service, or on-time delivery reliability.
Assesses the net profit of a customer, or segment, after deducting
the unique expenses required to support that customer or segment.
SOURCE: Adapted from Robert S. Kaplan and David P. Norton, The Balanced Scorecard: Translating Strategy into Action
(Boston: Harvard Business School Press, 1996): p. 68.
Internal Business Process Perspective
To develop the value proposition that will reach and satisfy targeted customer segments and
to achieve the desired financial objectives, critical internal business processes must be developed and continually enriched. Internal business processes support two crucial elements of
a company’s strategy: (1) they create and deliver the value proposition for customers and
(2) they improve processes and reduce costs, enriching the productivity component in the
financial perspective. Among the processes vital to the creation of customer value are
1. Operations Management Processes,
2. Customer Management Processes,
3. Innovation Management Processes.
Strategic Alignment Robert S. Kaplan and David P. Norton emphasize that “value
is created through internal business processes.”32 Table 6.3 shows how key internal processes can be aligned to support the firm’s customer strategy or differentiating-value proposition. First, observe that the relative emphasis (see shaded areas) given to a particular
process vary by strategy. For example, a firm that actively pursues a product-leadership
strategy highlights innovation-management processes, whereas a company adopting a lowtotal-cost strategy assigns priority to operations-management processes. Second, although
the level of emphasis might vary, note how the various processes work together to reinforce the value proposition. For example, a low-total-cost strategy can be reinforced by
an innovation-management process that uncovers process improvements and a customer
relationship management process that delivers superb postsales support.
From our discussion of strategic positioning, recall that it is much harder for a
rival to match a set of interlocked processes than it is to replicate a single process.
Michael Porter observes:
Strategic fit among many activities is fundamental not only to competitive advantage but also to the sustainability of that advantage. . . . Positions built on systems
of activities are far more sustainable than those built on individual activities.33
32
Ibid., p. 43.
33
Michael E. Porter, “What Is Strategy?” Harvard Business Review 74 (November–December 1996): p. 73.
172 Part IV
Formulating Business Marketing Strategy
ALIGNING INTERNAL BUSINESS PROCESSES TO THE CUSTOMER STRATEGY
TABLE 6.3
Customer Strategy
The Focus of Internal Business Processes
Operations Management
Customer Relationship
Management
Innovation Management
Low-Total-Cost
Strategy
Highly Efficient
Operating Processes
Efficient, Timely
Distribution
Ease of Access for
Customers; Superb
Postsales Service
Seek Process Innovations
Gain Scale Economies
Product Leadership
Strategy
Flexible Manufacturing
Processes
Rapid Introduction
of New Products
Capture Customer Ideas
for New Offering
Educate Customers about
Complex New Products/
Services
Disciplined, HighPerformance Product
Development
First-to-Market
Complete
Customer
Solutions Strategy
Deliver Broad Product /
Service Line
Create Network of
Suppliers for Extended
Product/Service
Capabilities
Create Customized
Solutions for Customers
Build Strong Customer
Relationships
Develop Customer
Knowledge
Identify New
Opportunities to Serve
Customers
Anticipate Future
Customer Needs
Lock-in Strategies
Provide Capacity for
Proprietary Product /
Service
Reliable Access and
Ease of Use
Create Awareness
Influence Switching Costs
of Existing and Potential
Customers
Develop and Enhance
Proprietary Product
Increase Breadth /
Applications of Standard
SOURCE: Reprinted by permission of Harvard Business Review. From “Customer Objectives for Different Value Propositions” by Robert S. Kaplan
in Strategy Maps, p. 41. Copyright © 2004 by the Harvard Business School Publishing Corporation; all rights reserved.
Learning and Growth The fourth component of the balanced scorecard, learning and growth, highlights how the firm’s intangible assets must be aligned to its
strategy to achieve long-term goals. Intangible assets represent “the capabilities of
the company’s employees to satisfy customer needs.”34 The three principal drivers of
organizational learning and growth are
1. human capital—the availability of employees who have the skills, talent, and
know-how to perform activities required by the strategy;
2. information capital—the availability of information systems, applications, and
information-technology infrastructure to support the strategy;
3. organization capital—the culture (for example, values), leadership, employee
incentives, and teamwork to mobilize the organization and execute the
strategy.
34
Thomas A. Stewart, Intellectual Capital: The New Wealth of Organizations (New York: Doubleday, 1998), p. 67, cited in
Kaplan and Norton, Strategy Maps, pp. 202–203.
Chapter 6
Business Marketing Planning: Strategic Perspectives
173
Strategic Alignment To create value and advance performance, the intangible assets
of the firm must be aligned with the strategy. For example, consider a company that plans
to invest in staff training and has two choices—a training program on total quality management (TQM) or a training initiative on customer relationship management (CRM).
A company like Dell, which pursues a low-total-cost strategy, might derive higher value
from TQM training, whereas IBM’s consulting unit, which pursues a total customer solution strategy, would benefit more from CRM training. Unfortunately, research suggests
that two-thirds of organizations fail to create strong alignment between their strategies
and their human resources and information technology programs.35
Measuring Strategic Readiness Senior management must ensure that the firm’s
human resources and information technology systems are aligned with the chosen
strategy. To achieve desired performance goals in the other areas of the scorecard,
key objectives must be achieved on measures of employee satisfaction, retention, and
productivity. Likewise, front-line employees, like sales or technical service representatives, must have ready access to timely and accurate information. However, skilled
employees who are supported by a carefully designed information system will not
contribute to organizational goals if they are not motivated or empowered to do so.
Many firms, such as FedEx and 3M, have demonstrated the vital role of motivated
and empowered employees in securing a strong customer franchise.
Now that each of the components of the balanced scorecard have been defined,
let’s explore a clever tool that can be used to communicate the desired strategy path to
all employees while detailing the processes that will be used to implement the strategy.
Strategy Map
To provide a visual representation of the cause-and-effect relationships among the
components of the balanced scorecard, Kaplan and Norton developed what they call
a strategy map. They say that a strategy must provide a clear portrait that reveals how
a firm will achieve its desired goals and deliver on its promises to employees, customers, and shareholders. “A strategy map enables an organization to describe and
illustrate, in clear and general language, its objectives, initiatives, and targets; the
measures used to assess performance (such as market share and customer surveys);
and the linkages that are the foundation for strategic direction.”36
Key Strategy Principles Figure 6.6 shows the strategy map template for a firm
pursuing a product-leadership strategy. We can use this illustration to review and
reinforce the key principles that underlie a strategy map:
• Companies emphasize two performance levels in developing a financial
strategy—a productivity strategy and a revenue-growth strategy.
• Strategy involves choosing and developing a differentiated customer value proposition. Note the value proposition for product leadership: “Products and services that expand existing performance boundaries into the highly desirable.”
Recall that the other value propositions and customer strategies include low
total cost, complete customer solutions, and system lock-in.
35
36
Kaplan and Norton, Strategy Maps, p. 13.
Kaplan and Norton, “Having Trouble with Your Strategy?” p. 170.
174 Part IV
Formulating Business Marketing Strategy
FIGURE 6.6
STRATEGY MAP TEMPLATE: PRODUCT LEADERSHIP
Long-Term Shareholder Value
Financial
Perspective
Revenue Growth Strategy
Productivity Strategy
Revenues from
New Products
Manage Total Life-Cycle
Product Costs
Gross Margins:
New Products
”Products and Services That Expand Existing Performance Boundaries into the Highly Desirable“
Customer
Perspective
High-Performance Products: Smaller,
Faster, Lighter, Cooler, More
Accurate, More Storage, Brighter…
First to market
Operations Management
Internal
Perspective
Flexible
Robust
Processes
Supply
Capacity for
Rapid Growth
Rapid
Introduction of
New Products
In-line
Experimentation
and
Improvement
”
New Customer
Segments
Customer Management
Innovation
Regulatory and Social
Educate Customers
about Complex
New Products/Services
Disciplined,
High-Performance
Product
Development
Minimize
Product Liability and
Environmental
Impact
Capture Customer
Ideas for New
Products/Services
Product
Development Time:
From Idea to Market
Contribute to
Communities
“Find, Motivate, Grow, and Retain the Best Talent”
A Capable, Motivated and Technologically Enabled Workforce
Learning and
Growth
Perspective
Human Capital
Deep
Functional
Expertise
Creative, Versatile
Employees: Crossfunctional Teamwork
Information Capital
Virtual Product
Prototyping and
Simulation
Computer-Aided Design
and Manufacturing
(CAD/CAM)
Organization Capital
Creativity,
Innovation
SOURCE: Reprinted by permission of Harvard Business Review. From “Project Leadership” by Robert S. Kaplan in Strategy Maps, p. 326.
Copyright © 2004 by the Harvard Business School Publishing Corporation; all rights reserved.
• Value is created through internal business processes. The financial and customer perspectives in the balanced scorecard and strategy map describe the performance
outcomes the firm seeks, such as increases in shareholder value through revenue
growth and productivity improvements, as well as enhanced performance outcomes from customer acquisition, retention, loyalty, and growth.
• Strategy involves identifying and aligning the critical few processes that are most important for creating and delivering the customer value proposition. For a product-leadership
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175
strategy, observe how each of the internal business processes directly supports
the customer value proposition—product leadership.
• Value is enhanced when intangible assets (for example, human capital) are aligned with
the customer strategy. From Figure 6.6, note the strategic theme for learning and
growth: “a capable, motivated, and technologically enabled workforce.” When
the three components of learning and growth—human, information, and organization capital—are aligned with the strategy, the firm is better able to mobilize action and execute that strategy.
To recap, the balanced scorecard provides a series of measures and objectives
across four perspectives: financial, customer, internal business process, and learning
and growth. By developing mutually reinforcing objectives across these four areas, a
strategy map can be used to tell the story of a business unit’s customer strategy and to
highlight the internal business processes that drive performance.
Summary
Guided by a deep understanding of the needs of customers and the capabilities of
competitors, market-driven organizations are committed to a set of processes, beliefs, and values that promote the achievement of superior performance by satisfying
customers better than competitors do. Because many business-to-business firms have
numerous divisions, product lines, and brands, three major levels of strategy exist in
most large organizations: (1) corporate, (2) business level, and (3) functional. Moving
down the strategy hierarchy, the focus shifts from strategy formulation to strategy
implementation. Marketing is best viewed as the functional area that manages critical
connections between the organization and customers. Business marketing planning
must be coordinated and synchronized with corresponding planning efforts in other
functional areas. Strategic plans emerge out of a bargaining process among functional
areas. Managing conflict, promoting cooperation, and developing coordinated strategies are all fundamental to the business marketer’s role.
A business model or concept consists of four major components: (1) a core strategy,
(2) strategic resources, (3) the customer interface, and (4) the value network. The core
strategy is the essence of how the firm competes, whereas strategic resources capture
what the firm knows (core competencies), what the firm owns (strategic assets), and what
employees actually do (core processes). Specifying the benefits to customers is a critical
decision when designing a core strategy. The customer interface component refers to
how customer relationship management strategies are designed and managed, whereas
the value network component considers how partners and supply chain members can
complement and strengthen the resource base of the firm. To establish and maintain
a distinctive strategic positioning, a company should focus on profitability, rather than
just revenue growth, deliver a unique value proposition, and configure activities—like
new product development or customer relationship management—differently from
rivals and in a manner that supports its value proposition.
Successful execution involves linking strategy to operations, using tools and processes like the balanced scorecard and strategy map. The balanced scorecard converts
a strategy goal into concrete objectives, and measures are organized into four different
perspectives: financial, customer, internal business process, and learning and growth.
176 Part IV
Formulating Business Marketing Strategy
The approach involves identifying target customer segments, defining the differentiating customer value proposition, aligning the critical internal processes that deliver
value to customers in these segments, and selecting the organizational capabilities necessary to achieve customer and financial objectives. Business marketers primarily emphasize one of the following value propositions or customer strategies: low total cost,
product leadership, or system lock-in. A strategy map provides a visual representation
of a firm’s critical objectives and the cause-and-effect relationships among them that
drive superior organizational performance.
Discussion Questions
1. Commenting on the decision-making process of his organization, a
senior executive noted: “Sometimes the process is bloody, ugly, just like
sausage meat being made. It’s not pretty to watch but the end results are
not too bad.” Why do various functional interest groups often embrace
conflicting positions during the strategic decision process? How are
decisions ever made?
2. Describe how the primary focus of marketing managers at the corporate
level differs from the focus marketing managers take at the business-unit
or functional level.
3. A day in the life of a business marketing manager involves interactions
with managers from other functions in the firm. First, identify the
role of R&D, manufacturing, and logistics functions in creating and
implementing marketing strategy. Next, describe some of the common
sources of conflict that can emerge in cross-functional relationships.
4. Gary Hamel, a leading strategy consultant, contends that managers as
well as Wall Street analysts like to talk about business models but few
of them could define “what a business model or business concept really
is.” Describe the major components of a business model and discuss
how these components are linked to the benefits a firm provides to
customers.
5. Select a firm such as FedEx, Apple, IBM, Boeing, GE, or Caterpillar
and assess its business model. Develop a list of particular skills, resources,
and strategies that are especially important to the selected firm’s
strategic position. Give particular attention to those skills, resources, or
characteristics that competitors would have the most difficulty in matching.
6. “Trying to be all things to all customers almost guarantees a weak
strategic position for a firm.” Agree or disagree? Explain.
7. Strategy experts argue that effective and aligned internal business
processes determine how value is created in an organization. Provide an
illustration to demonstrate the point.
8. Describe why a business-to-business firm that plans to enter a new
market segment may have to realign its internal business processes to
succeed in this segment.
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177
9. Describe how the learning and growth objectives in a balanced scorecard
might differ for a firm pursuing a low-total-cost strategy versus one that
emphasizes complete customer solutions.
10. The fourth component of the balanced scorecard, learning and
growth, captures the intangible assets of the firm (for example,
human, information, and organization capital). Describe the role
these intangible assets might assume in executing strategy at FedEx
or Google.
Internet Exercises
1. 3M is a large, diversified, technology company that has numerous
business units and manufactures thousands of products. Go to
http://www.3m.com and
a. identify the major market or industry sectors that the firm serves;
b. describe a new product that 3M has recently introduced for the
health-care sector.
CASE
Microsoft Targets Small and Mid-Sized Businesses37
By targeting small and medium-sized businesses, Microsoft hopes to capture a lucrative market sector, offsetting the slower growth among large-enterprise customers.
This large and highly fragmented market includes small businesses with fewer than
50 employees and mid-sized firms with fewer than 500 employees. Microsoft’s chief
executive, Steve Ballmer, views this market sector as the most vital and fastest-growing
segment of the economy. To serve small and mid-market customers, Microsoft has
developed a multiyear product plan that calls for increased investment in research and
development.
Challenging Intuit, Inc.
Targeting small-business customers, Microsoft recently introduced Microsoft Office
Small Business Accounting and Microsoft Office Small Business Management. These
offerings are designed to enable small businesses to manage all their sales, marketing,
and financial processes within an easy-to-use operating environment. The software is
widely available through resellers and retail outlets, including Amazon.com, Best Buy,
Office Depot, and Staples. Likewise, Dell offers the software preinstalled on selected
Dell small-business computing systems.
By introducing a small-business accounting program, Microsoft is taking direct
aim at Intuit, Inc.’s widely used QuickBooks accounting software. Dan Levin, vice
president of product management at Intuit, welcomed the competition, adding that
the new accounting program “marks the fourth time Microsoft has attempted entry
into the small business accounting software market.” Intuit is the undisputed leader in
this market with its QuickBooks product line, but Microsoft wants to build volume in
the small-business accounting market.
Among the key battlegrounds where the two will compete head-to-head are
• first-time accounting software users, most heavily concentrated in the one-tofour-employee segment, that still use basic checkbook accounting and manual
processes;
• the one-third of small businesses that upgrade or change their software
annually;
• the more than 500,000 new small businesses created in the United States each year.
37“Microsoft Goes After Small Business,” CNN Money, September 7, 2005, http://www.cnnmoney.com, and “Cashing in on
the U.S. Small Business Accounting Market: Intuit and Microsoft Go Head to Head,” Access Markets International Partners,
Inc., March 13, 2006, accessed at http://www.ami-partners.com on July 12, 2008.
178
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179
Discussion Questions
1. To succeed against rivals like Intuit that specialize in small-business customers,
describe the differentiating value proposition that Microsoft should offer to
customers.
2. Drawing on the balanced scorecard, describe how Microsoft might realign
its internal business processes (for example, operations, customer, innovation
management) to achieve targeted revenue and profit goals in the small- and
mid-sized business segment. What steps might Intuit take to counter Microsoft’s
challenges?
CHAPTER
7
Business Marketing Strategies
for Global Markets
Business marketing firms that restrict their attention to the domestic market are
overlooking enormous international market opportunities and a challenging field of
competitors. After reading this chapter, you will understand:
1. how to capture the sources of global advantage in rapidly developing
economies such as China and India.
2. the spectrum of international market-entry options and the strategic
significance of different forms of global market participation.
3. the distinctive types of international strategy.
4. the essential components of a global strategy.
180
Chapter 7
Business Marketing Strategies for Global Markets
181
A recent Business Week article focused on the significant increase in global competition large U.S. industrial corporations face. Huge but relatively unknown firms from
emerging markets are challenging Western firms in almost every global setting.
From India’s Infosys Technologies (IT services) to Brazil’s Embraer (light
jets), and from Taiwan’s Acer (computers) to Mexico’s Cemex (building materials), a new class of formidable competitors is rising. There are 25 worldclass emerging multinationals today and within 15 years, there will be at least
100 of them. The biggest challenge posed by these up-and-coming rivals will
not be in Western markets, but within developing nations. That’s the arena of
fastest global growth—and home to 80 percent of the world’s 6 billion consumers, hundreds of millions of whom have moved into the middle class. . . .
The rise of these new multinationals will force American business marketers
to rethink strategies for Third World product development, marketing, and
links with local companies.1
Truly, business-to-business marketing is worldwide in scope, and the very existence of many business marketing firms will hinge on their ability to act decisively,
compete aggressively, and seize market opportunities in rapidly expanding global
economies. Numerous business marketing firms—such as GE, IBM, Intel, Boeing,
and Caterpillar—currently derive much of their profit from global markets. They
have realigned operations and developed a host of new strategies to strengthen market positions and compete effectively against the new breed of strong global rivals.
This chapter will examine the need for, and the formulation of, global business
marketing strategies. The discussion is divided into four parts. First, attention centers on rapidly developing economies, like China, and the sources of global advantage
they can represent for business marketing firms. Second, international market-entry
options are isolated and described. Third, “multidomestic” and “global” strategies
are compared, and prescriptions provided for where they are most effectively applied.
Fourth, the critical requirements for a successful global strategy are explored.
Capturing Global Advantage in
Rapidly Developing Economies2
A set of rapidly developing economies (RDEs) is reshaping the playing field and forcing business marketing executives to rethink their strategies and the scope of their
operations. Key RDEs include, of course, China and India, as well as Mexico, Brazil, central and eastern Europe, and Southeast Asia. Let’s put the growth of these
economies in perspective. Whereas the United States, western Europe, and Japan are
projected to grow by roughly $3 trillion in collective gross domestic product (GDP)
1 Jeffrey E. Garten, “A New Threat to America, Inc.,” Business Week, July 25, 2005, p. 114. For a review of the top-100
international challengers, see Harold L. Sirkin, James W. Hemerling, and Arindam K. Bhattacharya, Globality: Competing
with Everyone from Everywhere for Everything (New York: Business Plus, 2008).
2 This section is based on Arindam Bhattacharya, Thomas Bradtke, Jim Hemerling, Jean Lebreton, Xavier Mosquet,
Immo Rupf, Harold L. Sirkin, and Dave Young, “Capturing Global Advantage: How Leading Industrial Companies Are
Transforming Their Industries by Sourcing and Selling in China, India, and Other Low-Cost Countries,” The Boston
Consulting Group, Inc., April 2004, accessed at http://www.bcg.com.
182 Part IV
Formulating Business Marketing Strategy
from 2004 to 2010, the key RDEs will grow by more than $2 trillion. Specifically,
China’s GDP is expected to increase by $750 billion, central and eastern Europe’s by
$450 billion, Southeast Asia’s by $350 billion, India’s by $300 billion, Mexico’s by
$250 billion, and Brazil’s by $200 billion. During this period, as highly developed
economies like the United States and Japan experience annual GDP growth slightly
above 2 percent, China will grow four times as fast, and India, Southeast Asia, and
Mexico three times as fast. For example, Vietnam has become an extremely attractive
investment opportunity for many business-to-business firms. Vietnam was admitted to the World Trade Organization in 2007, and the country enjoys a solid base
of well-educated workers and a government determined to transform the country
into a powerful economic entity. It is one of the fastest-growing economies, with a
growth in GDP in 2007 of over 8 percent. Not only does Vietnam offer an excellent
base for manufacturing operations, it has also become a very attractive market for
business-to-business marketers. With a government willing to transform the country
into private industrial operations, it is a country that cannot be ignored by firms looking for lower-cost manufacturing opportunities and large markets.
While representing a potentially attractive market opportunity, RDEs also present
a formidable competitive challenge to firms in many industries. The migration of sourcing, manufacturing, and service operations from high-cost countries (for example, the
United States and western Europe) to low-cost countries (for example, China, Mexico,
and India) is well under way and accelerating. In the United States alone, the value
of offshore arrangements has increased steadily: The cumulative value of outsourcing
contracts rose from $50 billion in 2002 to more than $225 billion in 2007.3 In turn,
imports from these rapidly developing economies are making substantial inroads into
core industrial product categories that were historically thought to be protected from
such competition. However, leading firms like GE, Microsoft, Cisco, Apple, and
Siemens are seizing opportunities by capturing sources of global advantage. In
industry after industry, firms are under enormous pressure to make the move to global
operations.
Mapping Sources of
Global Advantage4
A firm can globalize its cost structure through the migration of sourcing, manufacturing,
R&D, and service operations from a high-cost country to an RDE. In creating advantaged global operations, companies might conduct R&D in the United States, manufacture some product lines in the United States and others in China and Mexico, and
locate customer service in India and Ireland. “Significant portions of manufacturing are
expected to remain advantaged in their current locations. Reasons for staying in highercost locations might include the need to safeguard intellectual property content, the
importance of collocation with customers, or the requirement to use local content.”5
3 David Jacoby and Bruna Fiqueiredo, “The Art of High-Cost Country Sourcing,” Supply Chain Management Review 12
(May/June 2008): p. 33.
4 Unless otherwise noted, this section draws on Jim Hemerling, Dave Young, and Thomas Bradtke, “Navigating the Five
Currents of Globalization: How Leading Companies Are Capturing Global Advantage,” BCG Focus (April 2005), The
Boston Consulting Group, Inc., accessed at http://www.bcg.com.
5 Battacharya et al., “Capturing Global Advantage,” p. 7.
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Business Marketing Strategies for Global Markets
183
Firms that quickly and intelligently seize global opportunities can secure three
forms of competitive advantage: (1) a cost advantage, (2) a market access advantage,
and (3) a capabilities advantage.
The Cost Advantage
The major driver for a move to RDE sourcing remains very large—and sustainable—
cost advantages from two primary sources: lower operating costs and lower capital
investment requirements. The savings are striking. Jim Hemerling and his colleagues
at the Boston Consulting Group assert that companies that globalize their cost structures by including RDEs can realize savings of 20 to 40 percent in the landed costs of
their products. The landed cost reflects the realized net savings after logistics costs,
other management costs, and import duties involved in moving the product from the
RDE (for example, China) to the market destination (for example, the United States).
In addition, the capital needed to create a manufacturing facility in an RDE is 20 to
40 percent lower than in a highly developed economy. In addition to the cost and investment advantages, another driver of lower costs has emerged in recent years: government subsidies. Subsidies in the form of direct payment to companies may allow
them to price their products below competitive prices and enjoy distinct advantages in
other global markets.
Lower Operating Costs The difference in labor costs is a major component of the
RDE cost advantage. Depending on the industry, the factory location, and the nature of employee benefits, a factory worker in the United States or Europe costs $15
to $30 or more per hour. By contrast, a factory worker in China earns $1 per hour,
whereas in Mexico and in central and eastern Europe, workers earn $2 to $8 per hour.
Figure 7.1 displays the realized cost savings (that is, 30 percent) for industrial products such as electric motors, transformers, and compressors that are manufactured in
a RDE. Observe that companies operating in a RDE save not only directly on labor
costs but also indirectly on domestic materials and components.
Business Process Outsourcing When the focus shifts from products to highly
labor-intensive sectors, such as services, the cost advantage of outsourcing to a
RDE is up to 60 percent. India now represents the global market leader in offshore
business-process outsourcing. Included here are not only transactional processes like
call centers but also core industrial processes such as R&D and supply chain management. A strong telecommunications infrastructure, coupled with large numbers of
highly educated English-speaking managers, engineers, and workers, constitute key
advantages for India. By outsourcing call centers to India, General Electric’s consumer
finance business saved 30 to 35 percent and American Express had savings of more than
50 percent.
Will the Cost Gap Persist? Experts suggest that the differential in labor rates between RDEs and developed countries will remain substantial for the foreseeable future, even if they grow at dramatically different rates. Wage growth in China and
India will be limited by the large number of underemployed people in both countries.
Likewise, companies that operate in RDEs have been able consistently to lower purchasing costs over time, achieving cost savings that significantly exceed those that are
normally found in the West.
184 Part IV
Formulating Business Marketing Strategy
FIGURE 7.1
RDES OFFER A SUBSTANTIAL COST ADVANTAGE OVER HIGHLY DEVELOPED ECONOMIES
Cost savings
Additional costs
120
100
100
20–25
5–10
Index
80
10–15
60
10
0–5
0–5
50
Scale
Special
Incentives
RDE
manufacturing
cost
5
5
70
40
20
0
Manufacturing Labor
cost in a highly
developed
economy
Depreciation Materials,
components,
and tooling
Logistics costs
Other
(transportation, management
additional
costs
inventory, and
expediting)
Import
duties
Landed cost
from
an RDE
SOURCE: Jim Hemerling, Dave Young, and Thomas Bradtke, “Navigating the Five Currents of Globalization: How Leading Companies Are
Capturing Global Advantage,” BCG Focus, January 2005, The Boston Consulting Group, Inc., accessed at http://www.bcg.com. Copyright © The
Boston Consulting Group, Inc. 2005. All rights reserved. Reprinted by permission.
Lower Capital Investment Requirements Another important—and sometimes
overlooked—source of the RDE cost advantage is lower capital investment requirements for plants and equipment. While lower operating costs benefit a firm’s profit
and loss (P&L) statement, lower capital investment requirements also represent significant savings on the balance sheet. The combination of lower product costs and
lower capital investment requirements can boost the total return on investment.
Figure 7.2 shows the typical cost differential for an industrial installation (for example,
factory) in a RDE versus one in a highly developed economy. Observe that a factory
in a RDE can be built for just 70 percent of the investment level needed in a highly
developed economy. These capital savings result from the lower cost of infrastructure
(15 percent savings), the lower cost of local machinery and equipment (10 percent),
and the opportunity to substitute labor for costly technology (10 percent). After accounting for the higher costs (5 percent) of imported machinery, the net capital savings are 30 percent in the RDE (see Figure 7.2).
Subsidies Many assume that China’s cost advantage in manufacturing comes from
cheap labor. But in China’s burgeoning steel industry, research suggests that massive
government energy subsidies, not other factors, keep prices down. These subsidies
have broad implications for how companies compete and collaborate with Chinese
Chapter 7
FIGURE 7.2
185
Business Marketing Strategies for Global Markets
RDES OFFER A SIGNIFICANT CAPITAL ADVANTAGE OVER HIGHLY DEVELOPED ECONOMIES
Capital savings
Additional capital needed
120
100
15
100
10
10
Index
80
5
70
Higher cost of
imported
machinery and
equipment
Investment
level in
an RDE
60
40
20
0
Investment
level in a
highly developed
economy
Lower cost of
infrastructure
(land and buildings)
Lower cost of
local machinery
and equipment
Less machinery
and equipment
SOURCE: Jim Hemerling, Dave Young, and Thomas Bradtke, “Navigating the Five Currents of Globalization: How Leading Companies Are
Capturing Global Advantage,” BCG Focus, January 2005, The Boston Consulting Group, Inc., accessed at http://www.bcg.com. Copyright © The
Boston Consulting Group, Inc. 2005. All rights reserved. Reprinted by permission.
businesses.6 The country has now become the world’s largest steel exporter by volume and it remains the world’s largest consumer and producer of steel, with 40 percent of global production. How did China make these astonishing gains so quickly
and manage to sell steel for about 19 percent less than steel from U.S. and European
companies? Labor accounts for less than 10 percent of the costs of producing Chinese
steel, and Chinese steel does not appear to rely on scale economies, supply chain proximities, or technological efficiencies to lower its costs. The answer was a $27 billion
energy subsidy (for coal) from the Chinese government. Since energy represents a
much larger cost than labor in steel production, the subsidy provides a huge global
cost advantage for the Chinese steel industry.
The Hidden Cost of RDE Operations The cost advantages gained through operations in a RDE can be eroded by additional costs if companies fail to recognize
them and aggressively control them. Among these hidden costs are7
One-time setup costs that include the typical costs of establishing a new
business, such as identifying and qualifying suppliers, creating a reliable
logistics chain, and training employees;
6 C. V. Usha and George T. Haley, “Subsidies and the China Price,” Harvard Business Review,
7 Battacharya et al., “Capturing Global Advantage,” pp. 20–21.
86 (June, 2008): p. 25.
186 Part IV
Formulating Business Marketing Strategy
Ongoing RDE risk management costs related to monitoring the quality of
suppliers, managing inventory in a longer-than-usual logistics chain, and
hedging exchange rate fluctuations;
Exit costs related to closing high-cost production or service facilities, including
asset write-offs and related restructuring costs, as well as “bad will” costs (for
example, damaged relations with unions) in the home country.
A good example of some of the hidden costs in RDE operations is the experience of
Intel in China. Intel built a large factory in the central region of China in an effort
to accommodate Chinese government pressure to develop the interior of the country. Intel did enjoy the advantage of very low cost labor and lower investment cost,
but the huge cost of transportation was not recognized until after the factory was
operating. Intel was unable to use large jumbo jets to ship finished computer chips
due to the lack of a suitable airport to accommodate Boeing 747s. Moving chips
by truck was also challenging because the specialized “air-ride” trucks required for
shipping fragile computer chips were not abundant in China. In fact, only 15 airride trucks could be found in the entire country! It took many months until more
air-ride trucks became available and a new airport could be built. This obvious
setback was a costly lesson in dealing with the lack of infrastructure in RDEs. In the
truck construction industry, some firms believe that to be able to source in China,
they must have a “piece price” savings of at least 20 percent in order to offset the
associated costs and risks.8
In most cases, business-to-business firms do not exit their home-country operations entirely. They prefer instead to maintain the best home-country operations
while moving only the least efficient to RDEs to remain competitive and to secure
market access.
The Market Access Advantage
Although companies traditionally relocated manufacturing operations to RDEs to
gain cost advantages, once they are established in these countries, they are ideally positioned to serve fast-growing local markets. The striking results that GE Healthcare
achieved in China illustrate the market access advantage.
GE Healthcare entered the market by transferring technology to local Chinese
R&D centers, which then developed “Chinese” versions of GE medical equipment
that offered roughly 80 percent of the performance of Western systems at just 50
percent of the price. Because these products met local needs, GE Healthcare became the market leader in China. Furthermore, the China-developed products also
appealed to customers in some Western countries where certain market segments
found compelling value in the unique trade-off between the products’ price and
functionality.
China’s Growing Role For many industrial product categories, China is already
the world’s largest market. China is the largest market for machine tools, the second
largest for power transmissions and distribution equipment, and the second largest
8 Rick Weber, “SC Goes Global,” Body Builders, 48 (March, 2007): p. 52
Chapter 7
Business Marketing Strategies for Global Markets
187
for energy consumption. On the consumer product side, China is the world’s largest market for cell phones, air conditioners, and refrigerators and represents a large
and rapidly growing market for personal computers, automobiles, and consumer electronics products. Other RDEs, like India, are also growing explosively. For Cummins
Inc., the diesel engine maker, China and India each represent a lucrative market today. But by 2010, Cummins projects revenues of $2 billion from India and $3 billion
from China.9
Following Key Customers to RDEs Many small and mid-sized companies are
following their customers to RDEs. For example, Phoenix Electric Manufacturing
Company, a Chicago-based producer of electric motors for power tools, kitchen appliances, and other products, added a factory in China.10 The move enabled Phoenix Electric to retain its largest customers—GE and Emerson Electric—which have
shifted most of their consumer-electronics production to the area. Similarly, Hiwasse
Manufacturing, an Arkansas-based manufacturer of steel products used in the control
panels of refrigerators, ovens, and other appliances, added a facility in Mexico near a
GE appliance manufacturing facility.11
A Twofold Strategy As major industrial sectors relocate manufacturing operations
to RDEs, business-to-business firms that supply these sectors must take decisive action. Jim Hemerling and his associates at the Boston Consulting Group provide this
advice:
Most companies need to develop a twofold strategic plan: to fill market gaps
at home, and to follow selected customers to their new locations. In our experience, it is rarely feasible to pursue only one or the other.12
For example, gaps can be filled at home by pursuing new lines of business or new
product or service opportunities where the home country advantage can be defended.
In turn, when moving to a RDE, suppliers must adjust their operating models to fully
capture the cost advantages.
The Capabilities Advantage
To reinforce the cost advantage of operating in RDEs, top-performing global companies capture second-order benefits by tapping into the rapidly developing base of
human talent in these countries. China and India each add over 350,000 science and
engineering graduates to their talent pool each year. In 2008, at least 5.59 million students will graduate from colleges in China, 13 percent more than last year, according
to the Chinese Ministry of Education.13 In fact, there are so many Chinese students
attending college, that 700,000 of the 2007 college graduates were unable to find a job
after they graduated, reinforcing the magnitude of the pool of educated talent available
to firms locating in China. Many global companies, like GE, Microsoft, Motorola,
9 Pete Engardio and Michael Arndt, “How Cummins Does It,” Business Week, August 22–29, 2005, pp. 82–83.
10 Dexter Roberts and Michael Arndt, “It’s Getting Hotter in the East,” Business Week, August 22–29, 2005, pp. 78–81.
11 Louis Uchitelle, “If You Can Make It Here . . . ,” New York Times, September 4, 2005, p. B-5.
12 Hemerling, Young, and Bradtke, “Navigating the Five Currents of Globalization,” pp. 9–10.
13 “Getting a Job May Be Tougher for Graduates,” China Daily, July 11, 2008, p. 11.
188 Part IV
Formulating Business Marketing Strategy
INSIDE BUSINESS MARKETING
How Offshore Outsourcing Affects Customer Satisfaction—
and a Company’s Stock Price!
Recent research suggests that sending customer
service abroad negatively affects customer
satisfaction. Jonathan Whitaker and his research
colleagues analyzed the outsourcing activities of
150 North American companies and business
units. As a group, those firms that outsourced saw
a drop in their score on the American Consumer
Satisfaction Index. Importantly, the declines in
consumer satisfaction scores were roughly the
same whether companies outsourced customer
service domestically or overseas.
Customer satisfaction scores tend to move in
the same direction as companies’ stock prices.
Based on this historical relationship, the average
decline in consumer satisfaction found at companies
outsourcing customer service is associated with
a roughly 1 to 5 percent decline in a company’s
market capitalization, depending on the industry in
which the company operates. That’s a steep price!
By the way, market capitalization is a measure of the
value of a firm (that is, total outstanding shares 3
stock price).
To improve the quality of outsourced customer
service, special attention should be given to insuring
that the provider has all the information required
to help the customer and is fully empowered to do
so. Interestingly, the researchers found that “backoffice offshoring had no effect on overall customer
satisfaction. So the savings a company garners
this way are not offset by dissatisfaction among
customers.”
SOURCE: Jonathan Whitaker, M.S. Krishnan, and Claes
Fornell, “Customer Service: How Offshore Outsourcing Affects
Customer Satisfaction,” The Wall Street Journal, July 7, 2008,
p. R4.
and Siemens, have created R&D centers in both India and China. For example,
Motorola employs several thousand engineers in China and operates a large R&D
center in Beijing.
Leading companies can make use of this capabilities advantage to accomplish the
following:
• Improve research and development: The much lower cost of engineers and skilled
technicians in RDEs allows companies to increase dramatically the amount of
R&D they do for a given budget level.
• Address unmet customer needs: The opportunity to make greater use of skilled labor in place of machines allows companies to manufacture customized products
less expensively than would be feasible in a more automated setting.
• Tailor products and services to the burgeoning local markets in RDEs: To illustrate,
Motorola’s Beijing R&D center develops cell phones for the local market—the
largest handset market in the world.14
Unique RDE Risks In a remote area of India, a group of gun-wielding commandos
emerged from the dense forest in India’s Chhattisgarh state. The guerrillas descended
on an iron ore processing plant owned by Essar Steel, one of India’s biggest companies. There the attackers torched the heavy machinery on the site, plus 53 buses and
trucks. The guerrillas left a note that basically said, “Stop shipping local resources out
14 Roberts and Arndt, “It’s Getting Hotter in the East,” pp. 78–81.
Chapter 7
TABLE 7.1
Business Marketing Strategies for Global Markets
189
DETERMINING WHICH PRODUCTS TO OUTSOURCE TO RAPIDLY DEVELOPING
ECONOMIES (RDES) AND WHICH TO KEEP AT HOME
Selected Criteria
Maintain Home-Based
Manufacturing
Relocate to RDEs
Labor Contract
Growth of Demand in Home Market
Size of RDE Market
Degree of Standardization
Intellectual Property Content
Logistical Requirements
Low
Low
Low
Low
High
High
High
High
High
High
Low
Low
SOURCE: Adapted from Arindam Bhattacharya et al., “Capturing Global Advantage: How Leading Industrial Companies
Are Transforming Their Industries by Sourcing and Selling in China, India, and Other Low-Cost Countries,” The Boston
Consulting Group, Inc., April 2004, pp. 26–30, accessed at http://www.bcg.com.
of the state—or else.” The assault on the Essar facility was the work of Naxalites—
Maoist insurgents who seek the violent overthrow of the state and who despise India’s
landowning and business classes. The Naxalites may be a major threat to India’s economic power, potentially more damaging to Indian companies, foreign investors, and
the state than pollution, crumbling infrastructure, or political gridlock.15 This is an
example of the serious risks that can appear in RDEs.
The Outsourcing Decision16
The decision to relocate manufacturing, R&D, or customer service to RDEs is a strategic decision involving a host of economic, competitive, and environmental considerations. Clearly, some products and services are better candidates for outsourcing
than others.
What Should Go? The criteria that favor relocation to RDEs include products or
services with high labor content, high growth potential, large RDE markets, and standardized manufacturing or service delivery processes (Table 7.1). These criteria reflect
each of the sources of global advantage we have explored. For services, the processes
most easily relocated are those that have well-defined process maps or those that
are rule-based (for example, the established protocol a customer service call
center uses).
What Should Not Go? Products and services that should remain at home include
“those for which protection of intellectual property is critical, those with extreme
logistical requirements, those with very high technology content or performance
requirements, and those for which customers are highly sensitive to the location of
production” (for example, certain military contracts).17 Concerns about intellectual
15 “In India, Death to Global Business,” Business Week; May 19, 2008, pp. 44–47.
16 Battacharya et al., “Capturing Global Advantage,” pp. 26–30.
17 Ibid., p. 29.
190 Part IV
Formulating Business Marketing Strategy
FIGURE 7.3
SPECTRUM OF INVOLVEMENT IN GLOBAL MARKETING
Low Commitment
Exporting
High Commitment
Contracting
Low Complexity
Strategic
Alliance
Joint
Venture
Multidomestic
Strategy
Global
Strategy
High Complexity
property (IP) theft is a major issue in most RDEs, particularly in China. Experts suggest that some multinational companies in China are losing the battle to protect their
IP, largely because they emphasize legal tactics rather than including IP directly into
their strategic and operational decisions. By carefully analyzing and selecting which
products and technologies to sell in China, the best companies reduce the chance that
competitors will steal their IP.
Global Market Entry Options18
To develop effective global marketing strategy, managers must evaluate the alternative ways that a firm can participate in international markets. The particular mode
of entry should consider the level of a firm’s experience overseas and the stage in the
evolution of its international involvement. Figure 7.3 illustrates a spectrum of options
for participating in global markets. They range from low-commitment choices, such
as exporting, to highly complex levels of participation, such as global strategies. Each
is examined in this section.
Exporting
An industrial firm’s first encounter with an overseas market usually involves exporting because it requires the least commitment and risk. Goods are produced at one
or two home plants, and sales are made through distributors or importing agencies in each country. Exporting is a workable entry strategy when the firm lacks the
resources to make a significant commitment to the market, wants to minimize political and economic risk, or is unfamiliar with the country’s market requirements and
cultural norms. Exporting is the most popular global market entry option among
small and medium-sized firms.19
Many companies begin export activities haphazardly, without carefully screening
markets or options for market entry. These companies may or may not have a measure of success, and they might overlook better export opportunities. If early export
18 The following discussion is based on Franklin R. Root, Entry Strategy for International Markets (Lexington, MA: D. C.
Heath, 1987); and Michael R. Czinkota and Ilka A. Ronkainen, International Marketing, 2d ed. (Hinsdale, IL: Dryden
Press, 1990).
19 Jery Whitelock and Damd Jobber, “An Evaluation of External Factors in the Decision of UK Industrial Firms to Enter
a New Non-Domestic Market: An Exploratory Study,” European Journal of Marketing 38 (11/12, 2004): p. 1440.
Chapter 7
Business Marketing Strategies for Global Markets
191
efforts are unsuccessful because of poor planning, the company may be misled into
abandoning exporting altogether. Formulating an export strategy based on good information and proper assessment increases the chances that the best options will be
chosen, that resources will be used effectively, and that efforts will consequently be
carried through to success.
The Commercial Service of the Department of Commerce has developed and
maintains a network of international trade specialists in the United States to help
American companies export their products and conduct business abroad. Trade specialists operate offices known as Export Assistance Centers (EACs) located in almost
100 cities in the United States and Puerto Rico that assist small and medium-sized
companies. EACs are known as “one-stop shops” because they combine the trade
and marketing expertise and resources of the Commercial Service along with the
finance expertise and resources of the Small Business Administration (SBA) and the
Export-Import Bank. Thus they provide companies with a wide array of services in
one location, and they also maximize resources by working closely with state and local
government as well as with private partners to offer companies a full range of expertise in international trade, marketing, and finance.20
Although it preserves flexibility and reduces risk, exporting may limit the future
prospects for growth in the country. First, exporting involves giving up direct control
of the marketing program, which makes it difficult to coordinate activities, implement
strategies, and resolve conflicts with customers and channel members. George Day
explains why customers may sense a lack of exporter commitment:
In many global markets customers are loath to form long-run relationships
with a company through its agents because they are unsure whether the
business will continue to service the market, or will withdraw at the first
sign of adversity. This problem has bedeviled U.S. firms in many countries,
and only now are they living down a reputation for opportunistically participating in many countries and then withdrawing abruptly to protect shortrun profits.21
Contracting
A somewhat more involved and complex form of international market entry is contracting. Included among contractual entry modes are (1) licensing and (2) management contracts.
Licensing Under a licensing agreement, one firm permits another to use its intellectual property in exchange for royalties or some other form of payment. The property might include trademarks, patents, technology, know-how, or company name. In
short, licensing involves exporting intangible assets.
As an entry strategy, licensing requires neither capital investment nor marketing strength in foreign markets. This lets a firm test foreign markets without a major
commitment of management time or capital. Because the licensee is typically a local
20 A Basic Guide to Exporting, the U.S. Department of Commerce with the assistance of Unz & Co., Inc. http://www
.export.gov/exportbasics/index.asp, accessed on July 18, 2008.
21 George S. Day, Market Driven Strategy: Processes for Creating Value (New York: The Free Press, 1990), p. 272.
192 Part IV
Formulating Business Marketing Strategy
company that can serve as a buffer against government action, licensing also reduces
the risk of exposure to such action. With increasing host-country regulation, licensing may enable the business marketer to enter a foreign market that is closed to either
imports or direct foreign investment.
Licensing agreements do pose some limitations. First, some companies
are hesitant to enter into license agreements because the licensee may become
an important competitor in the future. Second, licensing agreements typically
include a time limit. Although terms may be extended once after the initial agreement, many foreign governments do not readily permit additional extensions.
Third, a firm has less control over a licensee than over its own exporting or
manufacturing abroad.
Management Contracts To expand their overseas operations, many firms have
turned to management contracts. In a management contract the industrial firm
assembles a package of skills that provide an integrated service to the client. When
equity participation, either full ownership or a joint venture, is not feasible or is not
permitted by a foreign government, a management contract provides a way to participate in a venture. Management contracts have been used effectively in the service sector in such areas as computer services, hotel management, and food services. Michael
Czinkota and Ilka Ronkainen point out that management contracts can “provide organizational skills not available locally, expertise that is immediately available rather
than built up, and management assistance in the form of support services that would
be difficult and costly to replicate locally.”22
One specialized form of a management contract is a turnkey operation. This arrangement permits a client to acquire a complete operational system, together with
the skills needed to maintain and operate the system without assistance. Once the
package agreement is online, the client owns, controls, and operates the system. Management contracts allow firms to commercialize their superior skills (know-how) by
participating in the international market.
Other contractual modes of entry have grown in prominence in recent years.
Contract manufacturing involves sourcing a product from a producer located in
a foreign country for sale there or in other countries. Here assistance might be
required to ensure that the product meets the desired quality standards. Contract
manufacturing is most appropriate when the local market lacks sufficient potential
to justify a direct investment, export entry is blocked, and a quality licensee is not
available.
Strategic Global Alliances (SGA)
A strategic global alliance (SGA) is a business relationship established by two or more
companies to cooperate out of mutual need and to share risk in achieving a common
objective. This strategy works well for market entry or to shore up existing weaknesses
and increase competitive strengths. A U.S. firm with a reliable supply base might
partner with a Japanese importer that has the established distribution channels and
customer base in Japan to form a strong entry into the Japanese market.23 Alliances
22 Czinkota and Ronkainen, International Marketing, p. 493.
23 Laura Delaney, “Expanding Your Business Globally,” MultiLingual, 19 (April, 2008): pp. 10–11.
Chapter 7
Business Marketing Strategies for Global Markets
193
offer a number of benefits, such as access to markets or technology, economies of scale
in manufacturing and marketing, and the sharing of risk among partners (see
Chapter 4).
Although offering potential, global strategic alliances pose a special management
challenge. Among the stumbling blocks are these:24
• Partners are organized quite differently for making marketing and product
design decisions, creating problems in coordination and trust.
• Partners that combine the best set of skills in one country may be poorly
equipped to support each other in other countries, leading to problems in implementing alliances on a global scale.
• The quick pace of technological change often guarantees that the most attractive partner today may not be the most attractive partner tomorrow, leading to
problems in maintaining alliances over time.
Jeffrey Dyer and his colleagues conducted an in-depth study of 200 corporations
and their 1,572 alliances and found that, on average, the top 500 global companies
each participate in 60 major strategic alliances.25 Fraught with risk, almost half of
these alliances fail. Recall from Chapter 4 that firms that excel at generating value
from alliances have a dedicated strategic-alliance function. A dedicated function acts as a
focal point for learning and for leveraging feedback from prior and ongoing alliances.
The alliance function ensures that metrics are created and applied to monitor the performance of all of their alliances, domestic and global.
Joint Ventures
In pursuing international entry options, a corporation confronts a wide variety
of ownership choices, ranging from 100 percent ownership to a minority interest.
Frequently, full ownership may be a desirable, but not essential, prerequisite for
success. Thus a joint venture becomes feasible. The joint venture involves a jointownership arrangement (between, for example, a U.S. firm and one in the host country) to produce and/or market goods in a foreign market. In contrast to a strategic
alliance, a joint venture creates a new firm. Some joint ventures are structured so that
each partner holds an equal share; in others, one partner has a majority stake. The
contributions of partners can also vary widely and may include financial resources,
technology, sales organizations, know-how, or plant and equipment. Representing
a successful relationship is the 50-50 joint venture between Xerox Corporation and
Tokyo-based Fuji Photo Film Company. Through the joint venture, Xerox gained
a presence in the Japanese market, learned valuable quality management skills that
improved its products, and developed a keen understanding of important Japanese
24 Thomas J. Kosnik, “Stumbling Blocks to Global Strategic Alliances,” Systems Integration Age, October 1988, pp. 31–39.
See also Eric Rule and Shawn Keon, “Competencies of High-Performing Strategic Alliances,” Strategy & Leadership, 27
(September–October 1998): pp. 36–37.
25 Jeffrey Dyer, Prashant Kale, and Harbir Singh, “How To Make Strategic Alliances Work,” MIT Sloan Management Review
42 (2001): pp. 37–43.
194 Part IV
Formulating Business Marketing Strategy
ETHICAL BUSINESS MARKETING
The Bribery Dilemma in Global Markets
Global marketing managers often face a dilemma
when home-country regulations clash with
foreign business practices. A good case in point is
the aerospace industry. U.S. government policies
about bribery by private companies have affected
aircraft sales in some countries. The U.S. Foreign
Corrupt Practices Act (FCPA) of 1977 prohibits
payments by U.S. companies and individuals,
including exporters of aircraft, to obtain or retain
business and has had a major effect on how U.S.
companies conduct global business. Until 1999,
European laws on transnational bribery were
nonexistent. Accordingly, some European aerospace
manufacturers were widely alleged to have bribed
foreign public officials to win sales at the expense
of their U.S. competitors.
Currently, the U.S. government and the
Organization for Economic Cooperation and
Development (OECD) Working Group on
Bribery are trying to remove the major obstacles
to implementation of the OECD’s antibribery
convention. The U.S. government is also seeking
to strengthen OECD and other multilateral
and bilateral disciplines related to bribery and
corruption of public officials.
Interestingly, recent press reports allege that
European aerospace companies are among the
business groups pressing their governments to
relax antibribery rules. To the extent that bribery
and anticorruption disciplines and enforcement
in Europe remain weaker than under the U.S.
Foreign Corrupt Practices Act, European aerospace
companies will enjoy a competitive advantage
in sales competitions to foreign governments or
government-controlled airlines.
SOURCE: Joseph H. Bogosian, “Global Market Factors
Affecting U.S. Jet Producers,” Federal Document Clearing House
Congressional Testimony, Capital Hill Hearing Testimony,
House Transportation and Infrastructure, May 25, 2005.
rivals such as Canon, Inc., and Ricoh Company. This joint venture has thrived for
more than three decades.26
Advantages Joint ventures offer a number of advantages. First, joint ventures
may open up market opportunities that neither partner could pursue alone. Kenichi
Ohmae explains the logic:
If you run a pharmaceutical company with a good drug to distribute in Japan
but have no sales force to do it, find someone in Japan who also has a good
product but no sales force in your country. You get double the profit by putting two strong drugs through your fixed cost sales network, and so does your
new ally. Why duplicate such high expenses all down the line? . . . Why not
join forces to maximize contribution to each other’s fixed costs?27
Second, joint ventures may provide for better relationships with local organizations (for example, local authorities) and with customers. By being attuned to the host
country’s culture and environment, the local partner may enable the joint venture to
respond to changing market needs, be more aware of cultural sensitivities, and be less
vulnerable to political risk.
26 David P. Hamilton, “United It Stands—Fuji Xerox Is a Rarity in World Business: A Joint Venture That Works,”
The Wall Street Journal, September 26, 1996, p. R19.
27 Kenichi Ohmae, “The Global Logic of Strategic Alliances,” Harvard Business Review 67 (March–April 1989): p. 147.
Chapter 7
Business Marketing Strategies for Global Markets
195
The Downside Problems can arise in maintaining joint-venture relationships. A
study suggests that perhaps more than 50 percent of joint ventures are disbanded or
fall short of expectations.28 The reasons involve problems with disclosing sensitive
information, disagreements over how profits are to be shared, clashes over management style, and differing perceptions on strategy. Mihir Desai, Fritz Foley, and James
Hines studied more than 3,000 American global companies and report that joint ventures appear to be falling out of favor.29 Why? Increasing forces of globalization such
as fragmented production processes make the decision to not collaborate pay off. If
a firm is considering a joint venture, Desai, Foley, and Hines suggest that they first
isolate the reasons for considering a joint venture and make sure that “they can’t buy
the required services or that knowledge through an arms-length contract that doesn’t
require sharing ownership. . . . Second, explicitly lay out expectations for the partners
in legal and informal documents prior to the creation of the entity so that it’s clear
what each party is providing. Third, try out partners without setting up a joint venture by conducting business with them in some way. . . . Finally, specify simple exit
provisions at the onset and then don’t be afraid to walk and go it alone.”
Choosing a Mode of Entry
For an initial move into the global market, the full range of entry modes, presented
earlier, may be considered—from exporting, licensing, and contract manufacturing to
joint ventures and wholly owned subsidiaries. In high-risk markets, firms can reduce
their equity exposure by adopting low-commitment modes such as licensing, contract
manufacturing, or joint ventures with a minority share. Although nonequity modes of
entry—such as licensing or contract manufacturing—involve minimal risk and commitment, they may not provide the desired level of control or financial performance.
Joint ventures and wholly owned subsidiaries provide a greater degree of control over
operations and greater potential returns.
Once operations are established in a number of foreign markets, the focus often
shifts away from foreign opportunity assessment to local market development in each
country. This shift might be prompted by the need to respond to local competitors
or the desire to more effectively penetrate the local market. Planning and strategy assume a country-by-country focus.
Multidomestic versus Global Strategies
Business marketing executives are under increasing pressure to develop globally integrated strategies to achieve efficiency and rationalization across their geographically
dispersed subsidiaries. As such, the challenge of internationalizing the firm is not in
providing a homogeneous offering across markets, but rather in finding the best balance
between local adaptation (a multidomestic strategy) and global optimization, where one
integrated strategy is applied globally.30 Multinational firms have traditionally managed
28 Arvind Parkhe, “Building Trust in International Alliances,” Journal of World Business 33 (Winter 1998): pp. 417–437.
29 Mihir A. Desai, C. Fritz Foley, and James Hines, “The Costs of Shared Ownership: Evidence From International Joint
Ventures,” Journal of Financial Economics 73 (2004): pp. 323–374.
30 G. Tomas M. Hult, S. Tamer Cavusgil, Seyda Deligonul, Tunga Kiyak, and Katarina Lagerström, “What Drives
Performance in Globally Focused Marketing Organizations? A Three-Country Study,” Journal of International Marketing
15 (2007): pp. 58–85.
196 Part IV
Formulating Business Marketing Strategy
B2B TOP PERFORMERS
General Electric Aircraft Engines: Global Strategy
Means Help Your Customers
General Electric’s (GE’s) Aircraft Engine Division
must maintain a very large global presence, as
it markets jet engines to almost every airline in
the world. Although most large airlines purchase
their aircraft from either Boeing or Airbus, the
individual airline makes the choice as to the jet
engine manufacturer. Thus, Singapore Air can
choose between Pratt & Whitney, Rolls-Royce, or
GE. The stakes are high in the industry, given that a
particular airline may purchase hundreds of aircraft
over a relatively short period of time. The challenges
are significant for the jet engine manufacturers:
They must have a solid relationship with aircraft
manufacturers like Boeing and Airbus, but just as
important, they need to expend considerable effort
to woo and then keep the airlines as customers.
Making GE’s job tougher are the global aspects of
these relationships. First, Boeing is an American firm
and Airbus is a joint venture of firms from several
European Union countries. Several other airframe
manufacturers are located in Brazil, Canada, and
China—and these manufacturers cater to the
smaller, regional airlines that fly 50- to 100-seat jets.
Even more daunting is the fact that there are close to
80 airlines located all over the world, only a handful
of which are U.S.-based.
A major element in GE’s marketing strategy
is to offer assistance to global customers in
creative ways. For example, one new customer
is a Chinese airframe manufacturer that had
not yet built its first airplane when GE began
interacting with company executives! The firm’s
first airplane would not roll off the assembly line
until 2008, yet GE began building relationship
ties with this company in 2003—in a subtle way.
Because the Chinese airframe manufacturer is
a brand-new company, key managers lacked
experience in all the key aspects of business-tobusiness marketing. GE’s response: help educate
the airframe manufacturer’s sales and marketing
personnel in all facets of business-to-business
marketing. One element of this approach was to
invite the entire marketing and sales team to GE’s
U.S. headquarters for a two-week seminar on B2B
marketing. Follow-up would take place in China
at a later date to review assignments and projects
given to the participants at the first seminar. GE
will also work hand-in-hand with the Chinese
sales team as they begin making sales calls on the
airlines that are potential buyers of their aircraft.
GE’s efforts illustrate the challenges of selling in
rapidly growing global markets where potential
customers are rather inexperienced in many facets
of business. The challenges for GE are complex,
as it must deal with the cultural and business
process issues of its Chinese customer, as well as
those of all the airlines around the world to whom
the Chinese firm will sell the airplanes.
operations outside their home country with multidomestic strategies that permit individual subsidiaries to compete independently in their home-country markets. The
multinational headquarters coordinates marketing policies and financial controls and
may centralize R&D and some support activities. Each subsidiary, however, resembles
a strategic business unit that is expected to contribute earnings and growth to the organization. The firm can manage its international activities like a portfolio. Examples of
multidomestic industries include most types of retailing, construction, metal fabrication, and many services.
In contrast, a global strategy seeks competitive advantage with strategic choices
that are highly integrated across countries. For example, features of a global strategy
might include a standardized core product that requires minimal local adaptation and
that is targeted on foreign-country markets chosen on the basis of their contribution
to globalization benefits. Prominent examples of global industries are automobiles, commercial aircraft, consumer electronics, and many categories of industrial machinery.
Chapter 7
Business Marketing Strategies for Global Markets
197
Major volume and market-share advantages might be sought by directing attention to the
United States, Europe, and Japan, as well as to the rapidly developing economies of China
and India.
Source of Advantage: Multidomestic versus Global
When downstream activities (those tied directly to the buyer, such as sales and customer service) are important to competitive advantage, a multidomestic pattern of
international competition is common. In multidomestic industries, firms pursue
separate strategies in each of their foreign markets—competition in each country is
essentially independent of competition in other countries (for example, Alcoa in the
aluminum industry, Honeywell in the controls industry).
Global competition is more common in industries in which upstream and support activities (such as technology development and operations) are vital to competitive advantage. A global industry is one in which a firm’s competitive position in one
country is significantly influenced by its position in other countries (for example, Intel
in the semiconductor industry, Boeing in the commercial aircraft industry).
In his book, Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter, Pankaj Ghemawat suggests that most types of economic activity that
can be conducted either within or across borders are still quite localized.31 He argues
that firms must be very careful in deciding between a multidomestic or global strategy because the “internationalization of numerous key economic activities, including
fixed capital investment, telephone and Internet traffic, tourism, patents, stock investments, etc., remains at around only 10 percent.” In his view, national borders are
still significant and effective international strategies need to take into account both
cross-border similarities and critical differences.32 In the current global business environment where security is a major issue, intellectual property rights are in question,
there are increased threats of economic protectionism, and a number of countries are
reasserting national sovereignty, the decision to follow a purely global strategy must
be carefully scrutinized.
Coordination and Configuration Further insights into international strategy can
be gained by examining two dimensions of competition in the global market: configuration and coordination. Configuration centers on where each activity is performed,
including the number of locations. Options range from concentrated (for example,
one production plant serving the world) to dispersed (for example, a plant in each
country—each with a complete value chain from operations to marketing, sales, and
customer service). By concentrating an activity such as production in a central location, firms can gain economies of scale or speed learning. Alternatively, dispersing
activities to a number of locations may minimize transportation and storage costs,
tailor activities to local market differences, or facilitate learning about market conditions in a country.
Coordination refers to how similar activities performed in various countries are
coordinated or coupled with each other. If, for example, a firm has three plants—one
in the United States, one in England, and one in China—how do the activities in
31 Pankaj Ghemawat,
Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter (Boston:
Harvard Business School Press, 2007), pp. 9–32.
32 Ibid., p. 22.
198 Part IV
Formulating Business Marketing Strategy
FIGURE 7.4
TYPES OF INTERNATIONAL STRATEGY
High
High Foreign
Investment with
Extensive Coordination
among
Subsidiaries
Purest Global
Strategy
Value
Activities
Coordination
of Activities
Country-Centered
Strategy by
Multinationals
with a Number of
Domestic Firms
Operating in
Only One Country
Export-Based
Strategy with
Decentralized
Marketing
Geographically
Dispersed
Geographically
Concentrated
Low
Configuration of Activities
SOURCE: From “Changing Patterns of International Competition” by Michael Porter. Copyright © 1986, by The
Regents of the University of California. Reprinted from the California Management Review, Vol. 28, No. 2. By permission
of The Regents.
these plants relate to one another? Numerous coordination options exist because of
the many possible levels of coordination and the many ways an activity can be performed. For example, a firm operating three plants could, at one extreme, allow each
plant to operate autonomously (unique production processes, unique products). At the
other extreme, the three plants could be closely coordinated, utilizing a common information system and producing products with identical features. Dow Chemical, for
example, uses an enterprise software system that allows it to shift purchasing, manufacturing, and distribution functions worldwide in response to changing patterns of
supply and demand.33
Types of International Strategy
Figure 7.4 portrays some of the possible variations in international strategy. Observe
that the purest global strategy concentrates as many activities as possible in one country,
33 Thomas H. Davenport, “Putting the Enterprise into the Enterprise System,” Harvard Business Review, 76 (July–August
1998): pp. 121–131.
Chapter 7
Business Marketing Strategies for Global Markets
199
serves the world market from this home base, and closely coordinates activities that
must be performed near the buyer (for example, service). Caterpillar, for example, views
its battle with the formidable Japanese competitor Komatsu in global terms. As well as
using advanced manufacturing systems that allow it to fully exploit the economies of
scale from its worldwide sales volume, Caterpillar also carefully coordinates activities in
its global dealer network. This integrated global strategy gives Caterpillar a competitive
advantage in cost and effectiveness.34 By serving the world market from its home base in
the United States and by closely coordinating sales and service with customers around
the world, Boeing also aptly illustrates a pure global strategy. Airbus—the European
aerospace consortium—is a strong and clever rival that competes aggressively with Boeing for orders at airlines around the world.35
A Global Battle for the PC Market Other interesting global face-offs involve
Dell, Inc., versus Lenovo Group, Inc. Dell is now pursuing an integrated global strategy and challenging Lenovo, China’s largest producer in its home market.36 Meanwhile, Lenovo gained worldwide reach when it purchased IBM’s PC division. In turn,
Hewlett-Packard remains a formidable rival for both.
Other Paths Figure 7.4 illustrates other international strategy patterns. Canon, for
example, concentrates manufacturing and support activities in Japan but gives local
marketing subsidiaries significant latitude in each region of the world. Thus, Canon
pursues an export-based strategy. In contrast, Xerox concentrates some activities and
disperses others. Coordination, however, is extremely high: The Xerox brand, marketing approach, and servicing strategy are standardized worldwide. Michael Porter
notes:
Global strategy has often been characterized as a choice between worldwide
standardization and local tailoring, or as the tension between the economic
imperative (large-scale efficient facilities) and the political imperative (local
content, local production). . . . A firm’s choice of international strategy involves a search for competitive advantage from configuration/coordination
throughout the value chain.37
A Strategic Framework
Recall that companies may pursue multidomestic strategies or global strategies. The
need for a global strategy is determined by the nature of international competition in
a particular industry. On the one hand, many industries are multidomestic, and competition takes place on a country-by-country basis with few linkages across operating
units (for example, construction and many service offerings). Multidomestic industries do not need a global strategy because the focus should be on developing a series
of distinct domestic strategies.
34 Donald V. Fites, “Make Your Dealers Your Partners,” Harvard Business Review 74 (March–April 1996): pp. 84–95.
35 Alex Taylor III, “Blue Skies for Airbus,” Fortune, August 2, 1999, pp. 102–108.
36 Evan Ramstad and Gary McWilliams, “For Dell, Success in China Tells Tale of Maturing Market,” The Wall Street
Journal, July 5, 2005, pp. A1, A8.
37 Michael E. Porter, “Changing Patterns of International Competition,” California Management Review 28 (Winter 1986):
p. 25.
200 Part IV
Formulating Business Marketing Strategy
A GENERAL FRAMEWORK FOR GLOBAL STRATEGY
FIGURE 7.5
Build on the Foundation of a Unique Competitive Position
Emphasize a Consistent Position Strategy
across International Markets
Global
Strategy
Establish a Clear Home Base for Each Distinct Business
Leverage Product-Line Home Bases at Different Locations
Disperse Activities to Extend Home Base Advantages
Coordinate and Integrate Dispersed Activities
SOURCE: Adapted from Michael E. Porter, “Competing across Locations: Enhancing Competitive Advantage through a
Global Strategy,” in Michael E. Porter, ed., On Competition (Boston: Harvard Business School Press, 1998), pp. 309–350.
Multidomestic Strategy38 Pankjak Ghemawat provocatively argues that the world
is not flat but semiglobalized, and that borders still exist and they matter when it
comes to designing strategy. However, instead of focusing exclusively on the physical boundaries, he suggests that managers look at differences between countries and
regions in terms of a framework that includes the following dimensions:
1. Cultural
2. Administrative/Political
3. Geographic
4. Economic
By analyzing these dimensions, a strategist can illuminate country-to-country differences,
understand the liability of “foreignness,” identify and evaluate foreign competitors, and
discount market sizes by distance. Following this assessment, the business-to-business
manager is better equipped to develop a responsive strategy for each country.
Global Strategy For truly global industries, a firm’s position in one country significantly affects its position elsewhere, so it needs a global strategy. Competing across
countries through an integrated global strategy requires a series of choices that are
highlighted in Figure 7.5.
38 Ghemawat,
Redefining Global Strategy, pp. 19–32.
Chapter 7
Business Marketing Strategies for Global Markets
201
Global Strategy39
Build on a Unique Competitive Position
A business marketing firm should globalize first in those business and product lines
where it has unique advantages. To achieve international competitive success, a firm
must enjoy a meaningful advantage on either cost or differentiation. To this end, the
firm must be able to perform activities at a lower cost than its rivals or perform activities
in a unique way that creates customer value and supports a premium price. For example,
Denmark’s Novo-Nordisk Group (Novo) is the world’s leading exporter of insulin and
industrial enzymes. By pioneering high-purity insulins and advancing insulin delivery
technology, Novo achieved a level of differentiation that gave it a strong competitive
position in the health-care market in the United States, Europe, and Japan.
Emphasize a Consistent Positioning Strategy
Rather than modifying the firm’s product and service offerings from country to country, “a global strategy requires a patient, long-term campaign to enter every significant foreign market while maintaining and leveraging the company’s unique strategic
positioning.”40 One of the greatest barriers to the success of firms in smaller countries
is the perceived need to serve all customer segments and to offer an expanded product
assortment to capture the limited market potential. However, by maintaining a consistent position, a firm reinforces its distinctive strategy and keeps its strategic attention focused on the much larger international opportunity.
Establish a Clear Home Base for Each Distinct Business
Although the location of corporate headquarters is less important and may reflect historical factors, a firm must develop a clear home base for competing in each of its strategically distinct businesses. “The home base for a business is the location where strategy
is set, core product and process technology is created and maintained, and a critical
mass of sophisticated production and service activities reside.”41 For example, Japan,
Honda’s home base for both motorcycles and automobiles, is where 95 percent of
its R&D employees are located and all of its core engine research is conducted. For
Hewlett-Packard (H-P), the United States hosts 77 percent of the physical space dedicated to manufacturing, R&D, and administration but only 43 percent of H-P’s physical
space dedicated to marketing. At H-P’s home base, R&D managers with specialized expertise are designated worldwide experts; they transfer their knowledge either electronically or through periodic visits to subsidiaries around the world. Regional subsidiaries
take responsibility for some process-oriented R&D activities and for local marketing.
The home base should be located in a country or region with the most favorable access
to required resources (inputs) and supporting industries (for example, specialized suppliers).
Such a location provides the best environment for capturing productivity and innovation
benefits. Honda as well as H-P each benefit from a strong supplier network that supports
39 This section is based on Michael E. Porter, “Competing across Locations: Enhancing Competitive Advantage
through a Global Strategy,” in Michael E. Porter, ed., On Competition (Boston: Harvard Business School Press, 1998),
pp. 309–350. See also Shaoming Zou and S. Tamer Cavusgil, “The GMS: A Broad Conceptualization of Global
Marketing Strategy and Its Effect on Firm Performance,” Journal of Marketing 66 (October 2002): pp. 40–56.
40 Porter, “Competing Across Locations,” p. 331.
41 Ibid., p. 332.
202 Part IV
Formulating Business Marketing Strategy
each of its principal businesses. The home base should also serve as the central integrating
point for activities and have clear worldwide responsibility for the business unit.
Leverage Product-Line Home Bases at Different Locations
As a firm’s product line broadens and diversifies, different countries may best provide
the home bases for some product lines. Responsibility for leading a particular product line should be assigned to the country with the best locational advantages. Each
subsidiary, then, specializes in products for which it has the most favorable advantages
(for example, specialized suppliers) and serves customers worldwide. For example,
H-P locates many product-line home bases outside the United States, such as its line
of compact inkjet printers, which is based in Singapore. In turn, Honda has begun to
create a product-line home base for Accord station wagons in the United States. The
model was conceived, designed, and developed through the joint efforts of Honda’s
California and Ohio R&D facilities.
Disperse Activities to Extend Home-Base Advantages
Although the home base is where core activities are concentrated, other activities can
be dispersed to extend the firm’s competitive position. Potential opportunities should
be examined in three areas:
• Capturing competitive advantages in purchasing. Inputs that are not central to the
innovation process, such as raw materials or general-purpose component parts,
must be purchased from the most cost-effective location.
• Securing or improving market access. By locating selected activities near the market, a firm demonstrates commitment to foreign customers, responds to actual or threatened government mandates, and may be better equipped to tailor
offerings to local preferences. For example, Honda has invested more than
$2 billion in facilities in the United States. Likewise, a host of firms, like
Honeywell, GE, and Intel, have made large investments in China and India.
• Selectively tapping competitive advantages at other locations. To improve capabilities in important skills or technologies at home, global competitors can locate
selected activities in centers of innovation in other countries. The goal here is
to supplement, but not replace, the home base. To illustrate, Honda gains exposure to California’s styling expertise and Germany’s high-performance design
competencies through small, local, company-financed design centers that transfer knowledge back to the Japanese home base.
Coordinate and Integrate Dispersed Activities
Coordination across geographically dispersed locations raises formidable challenges,
among them those of language and cultural differences and of aligning the reward
systems for individual managers and subsidiaries with the goals of the global enterprise as a whole. However, successful global competitors achieve unified action by
1. Establishing a clear global strategy that is understood by organizational
members across countries;
Chapter 7
TABLE 7.2
•
•
•
•
•
•
•
•
•
•
Business Marketing Strategies for Global Markets
203
KEY FACTORS FOR MANAGING RISK IN EMERGING MARKETS
Understand the individual markets: failing to do so is the fastest route to trouble.
Use local expertise: there is no substitute for local knowledge.
Find a partner: strong local relationships are critical.
Understand the culture: taking a consistent approach in all markets ignores cultural
differences with wildly different effects.
Understand local laws, regulations and ethics: don’t assume they are the same as in your
home market.
Be cautious and vigilant; pay attention to details, question, and be skeptical.
Communicate: open two-way communication is vital, and “gaps” are a crucial cause of
misunderstandings.
Be present: relationships and understanding do not happen remotely.
Be flexible in response to changing conditions: the pace of change can be dramatic.
Think long-term: put capacity and resources in place to support the investment over time.
SOURCE: From Risk Management in Emerging Markets, p. 6–7. Ernst and Young, 2007. © 2007 EYGM Limited. All rights
reserved. Reproduced by permission.
2. Developing information and accounting systems that are consistent on a
worldwide basis, thereby facilitating operational coordination;
3. Encouraging personal relationships and the transfer of learning among
subsidiary managers across locations;
4. Relying on carefully designed incentive systems that weigh overall contribution
to the entire enterprise in addition to subsidiary performance.
Managing Risk in Emerging Markets
Expansion into new global markets or the establishment of manufacturing activities in
low-labor-cost markets is not without risk, and the savvy business marketer will carefully
assess the risks associated with working in new, global environments (see Table 7.2).
Despite the huge market, low-cost labor, and reduced investment cost, there are still
many pitfalls associated with both selling and manufacturing in China. These potential
threats include: fragmented markets, limited intellectual property protection, an unstructured legal system, the lack of standardized accounting practices, and heavy investment
of government in every facet of business.42
Summary
Rapidly developing economies (RDEs), like China and India, present a host of opportunities and a special set of challenges for business-to-business firms. Companies that
decisively and intelligently pursue RDE strategies can secure three compelling forms
of competitive advantage: significantly lower costs; direct access to the fastest-growing
markets; and the capabilities for improving R&D, addressing unmet customer needs,
42 Chia Chia Lin and Jason Lin, “Capitalism in Contemporary China: Globalization Strategies, Opportunities, Threats,
and Cultural Issues,” Journal of Global Business Issues, 2 (Winter 2008): pp. 31–40
204 Part IV
Formulating Business Marketing Strategy
and increasing overall business effectiveness. The migration of sourcing, manufacturing, R&D, and customer service operations from developed economies to RDEs will
continue to accelerate in many industry sectors. However, some products and services
are better candidates for relocation or outsourcing than others. For example, those
with high labor content and large RDE markets represent solid outsourcing candidates, whereas those for which the protection of intellectual property is critical should
stay at home.
Once a business marketing firm decides to sell its products in a particular country, it must select an entry strategy. The range of options includes exporting, contractual entry modes (for example, licensing), strategic alliances, and joint ventures.
A more elaborate form of participation is represented by multinational firms that use
multidomestic strategies. Here a separate strategy might be pursued in each country
served. The most advanced level of participation in international markets is provided
by firms that use a global strategy. Such firms seek competitive advantage by pursuing
strategies that are highly interdependent across countries. Global competition tends
to be more common in industries in which primary activities, like R&D and manufacturing, are vital to competitive advantage.
A global strategy must begin with a unique competitive position that offers a
clear competitive advantage. Providing the best odds of global competitive success are
businesses and product lines where companies have the most unique advantages. The
home base for a business is the location where strategy is set, and the home base for
some product lines may be best positioned in other countries. Although core activities are located at the home base, other activities can be dispersed to strengthen the
company’s competitive position. Successful global competitors demonstrate special
capabilities in coordinating and integrating dispersed activities. Coordination ensures
clear positioning and a well-understood concept of global strategy among subsidiary
managers across countries. Successful global marketers understand the key risks associated with operating in the global environment, and they take steps to mitigate these
risks through their strategic approach to different global markets. To create effective
global strategies and capture important market opportunities, business-to-business firms
must develop a deep understanding of local markets and the special competitive and
environmental forces that will drive performance.
Discussion Questions
1. Evaluate this statement: Many business-to-business firms need to
fill market gaps at home with new products and services and also
follow selected customers to their new locations in rapidly developing
economies like India or China.
2. Many observers argue the cost advantage that rapidly developing economies
enjoy will evaporate in 5 to 10 years. Agree or disagree? Explain.
3. Describe the characteristics of products and services that would
represent poor candidates for outsourcing.
4. In addition to cost advantages, describe the other ways that rapidly
developing economies can contribute to competitive advantage.
5. The European aerospace consortium Airbus is a strong competitor to
Boeing and is climbing toward its long-stated goal of winning 50 percent
Chapter 7
Business Marketing Strategies for Global Markets
205
of the over-100-seat airline market. What criteria would a customer
like UPS or British Airways consider in choosing aircraft? What are the
critical factors that shape competitive advantage in the aircraft market?
6. A small Michigan-based firm that produces and sells component parts
to General Motors, Ford, and DaimlerChrysler wishes to extend market
coverage to Europe and Japan. What type of market entry strategy
would provide the best fit?
7. A major U.S. electronics firm decides the best approach to a global
business strategy is to employ a multidomestic strategy. It will focus
its efforts on China. Discuss some of the key threats the firm faces as it
enters this market. How could it mitigate some of the risks associated
with these threats?
8. A supplier of copper tubing and wire has adopted a multidomestic
strategy to enter the eastern European market. What factors should it
assess in these countries in order to formulate its marketing strategy in
each one. Explain.
9. Why would Hewlett-Packard assign product-line responsibility to a
subsidiary located outside the United States?
10. A global strategy begins with a unique competitive position that offers a
clear competitive advantage. What steps can a global competitor take to
ensure that the strategy is implemented in a consistent way in countries
around the world?
Internet Exercise
1. General Electric (GE) sells over $5 billion worth of goods and
services to Chinese customers in the business market. Go to http://
www.ge.com and first identify the various GE divisions, like Healthcare,
that contribute to sales volume and then identify a few products from
each division that likely address important needs or priorities in China.
CASE
Schwinn: Could the Story Have Been Different?43
At its peak, Schwinn had more than 2,000 U.S. employees, produced hundreds of thousands of bicycles in five factories, and held 20 percent of the market. Today, however,
Schwinn no longer exists as an operating company. The firm, founded in 1895, declared
bankruptcy in 1992 and closed its last factory one year later. The Schwinn name is now
owned by a Canada-based firm and all of the bikes are manufactured in Asia.
Harold L. Sirkin, a senior vice president at the Boston Consulting Group, argues
that Schwinn’s story could have been different. He outlines two alternative pathways
that might have provided a happier ending to the Schwinn story.
Alternative Reality One: Aim High
Under this scenario, Schwinn decided to center on midrange and premium segments
of the market, leaving low-end bicycles for competitors. However, the firm determined that it could substantially reduce costs by turning to low-cost partners in rapidly developing economies for labor-intensive parts. Schwinn interviewed hundreds of
potential suppliers and locked the best ones into long-term contracts. Schwinn then
reconfigured its operations to perform final assembly and quality inspection in the
United States. Still, the changes forced Schwinn to make some painful choices—nearly
30 percent of the workforce was laid off. However, such moves allowed Schwinn to
produce bikes at half the previous cost, maintain a significant position in the midrange
bicycle market, and leverage its product design capabilities to build a strong position
for its brand in the high-end market. As a result, Schwinn is extremely competitive in
the U.S. market and is a major exporter of premium bikes to China and Europe. Because of this growth, Schwinn now employs twice as many people in the United States
as it did before outsourcing began.
Alternative Reality Two: If You Can’t Beat Them, Join Them
Schwinn went on the offensive and moved as quickly as possible to open its own factory
in China. By bringing its own manufacturing techniques and by training employees
in China, Schwinn was able to achieve high quality and a much lower cost. However, the decision meant that 70 percent of Schwinn’s U.S. workers would lose their
jobs. But Schwinn kept expanding its China operations and soon started selling bicycles in the Chinese market—not only at the low end but also to the high-end, luxury
segment—leveraging its brand name. Schwinn then extended its global operations and
reach by adding new facilities in eastern Europe and Brazil. The company has sold
over 500,000 bikes in new markets and now has more employees in the United States
than it did before deciding to expand into international markets.
43 Harold L. Sirkin, “Don’t Be a Schwinn,” BCG/Perspectives, The Boston Consulting Group, Inc., January 2005, accessed
at http://www.bcg.com.
206
206
Chapter 7
Business Marketing Strategies for Global Markets
207
Discussion Question
1. By facing fierce competition from low-cost rivals, many business-to-business
firms in the United States and Europe face a situation today similar to Schwinn’s.
What lessons can they draw from the Schwinn story? How can they strengthen
their competitive position?
CHAPTER
8
Managing Products
for Business Markets
By providing a solution for customers, the product is the central force of business
marketing strategy. The firm’s ability to put together a line of products and services
that provide superior value to customers is the heart of business marketing management. After reading this chapter, you will understand:
1. how to build a strong business-to-business brand.
2. the strategic importance of providing competitively superior value to
customers.
3. the various types of industrial product lines and the value of product
positioning.
4. a strategic approach for managing products across the stages of the technology adoption life cycle.
208
Chapter 8
Managing Products for Business Markets
209
To spur growth at General Electric, CEO Jeffrey Immelt told GE’s 11 business unit
managers to each take 60 days and return with five ideas for growth that would generate at least $10 million in sales within three years.1 Of the 55 ideas proposed, 35 were
funded, ranging from wind-powered energy systems to sophisticated airport security
systems using medical scanning technology. A business marketer’s marketplace identity is established through its brand and through the products and services it offers.
For example, General Electric’s new branding campaign—“Ecomagination”—signals
to the market that the firm is very serious about its responsibilities to the environment
and is offering solutions such as wind, energy, and water filtration equipment as well
as clean-coal services.2 Because brands constitute one of the most valuable intangible
assets that firms possess, branding has emerged as a priority to marketing executives,
CEOs, and the financial community.
Product management is directly linked to market analysis and market selection.
Products are developed to fit the needs of the market and are modified as those needs
change. Drawing on such tools of demand analysis as business market segmentation
and market potential forecasting, the marketer evaluates opportunities and selects
profitable market segments, thus determining the direction of product policy. Product policy cannot be separated from market selection decisions. In evaluating potential product/market fits, a firm must evaluate new market opportunities, determine
the number and aggressiveness of competitors, and gauge its own strengths and weaknesses. The marketing function assumes a lead role in transforming an organization’s
distinctive skills and resources into products and services that enjoy positional advantages in the market.3
This chapter first explores the nature of the brand-building process and the way
in which a strong brand can sharpen the focus and energize the performance of the
firm. Second, it examines product quality and value from the customer’s perspective
and directly links them to business marketing strategy. Third, because industrial products can assume several forms, the chapter describes industrial product-line options,
while offering an approach for positioning and managing products in high-technology
markets.
Building a Strong B2B Brand
Although consumer packaged-goods companies like Procter & Gamble (P&G),
Coca-Cola, and Nestle have excelled by developing a wealth of enduring and highly
profitable brands, some of the most valuable and powerful brands belong to businessto-business firms: IBM, Microsoft, General Electric, Intel, Hewlett-Packard, Cisco,
Google, Oracle, Canon, Siemens, Caterpillar, and a host of others. For most business
marketers, the company name is the brand, so the key questions become: “What do
you want your company name to stand for? and What do you want it to mean in the
mind of the customer?”4
1Bob Lamons, The Case for B2B Branding (Mason, OH: Thomson Higher Education, 2005), pp. 142–144.
2Regis McKenna, Relationship Marketing (Reading, MA: Addison-Wesley, 1991), p. 7.
3Rajan Varadarajan and Satish Jayachandran, “Marketing Strategy: An Assessment of the State of the Field and Outlook,”
Journal of the Academy of Marketing Science 27 (Spring 1999): pp. 120–143.
4Frederick E. Webster Jr. and Kevin Lane Keller, “A Roadmap for Branding in Industrial Markets,” Journal of Brand
Management 12 (May 2004): p. 389.
210 Part IV
Formulating Business Marketing Strategy
FIGURE 8.1
CUSTOMER-BASED BRAND EQUITY PYRAMID
Intense, active loyalty
Consumerbrand
resonance
Consumer
judgments
Positive, accessible
reactions
Consumer
feelings
Brand
performance
Brand
imagery
Strong, favorable and
unique brand associations
Brand salience
Deep, broad brand
awareness
SOURCE: Kevin Lane Keller, “Building Customer-Based Brand Equity,” Marketing Management 10 (July/August
2001): p. 19. Copyright © 2001 American Marketing Association. All rights reserved. Reproduced by permission.
David Aaker says, “Brand equity is a set of brand assets and liabilities linked to
a brand, its name, and symbol that add to or subtract from the value provided by a
product or service and/or to that firm’s customers.”5 As we will explore, the assets and
liabilities that impact brand equity include brand loyalty, name awareness, perceived
quality and other brand associations, and proprietary brand assets (for example, patents). A brand, then, is a name, sign, symbol, or logo that identifies the products and
services of one firm and differentiates them from competitors.
Providing a rich and incisive perspective, Kevin Lane Keller defines customerbased brand equity (CBBE) as the differential effect that customers’ brand knowledge has on their response to marketing activities and programs for that brand.6 The
basic premise of his CBBE model is that the power of a brand lies in “what consumers
have learned, felt, seen, and heard about the brand over time.”7 So, the power of a
brand is represented by all the thoughts, feelings, perceptions, images, and experiences that become linked to the brand in the minds of customers.
Brand-Building Steps8
The CBBE model lays out a series of four steps for building a strong brand (see
Fig ure 8.1, right side): (1) develop deep brand awareness or a brand identity;
(2) establish the meaning of the brand through unique brand associations (that is, points
of difference); (3) elicit a positive brand response from customers through marketing programs; and (4) build brand relationships with customers, characterized by intense loyalty. Providing the foundation for successful brand management is the set of
5David Aaker, Managing Brand Equity (New York: The Free Press, 1991), p. 15.
6Kevin Lane Keller, Strategic Brand Management (3rd ed., Upper Saddle River, NJ: Prentice Hall, 2007).
7Webster and Keller, “A Roadmap for Branding,” p. 15.
8This section is based on Kevin Lane Keller, “Building Customer-Based Brand Equity,” Marketing Management 10 (July/
August 2001): pp. 15–19.
Chapter 8
Managing Products for Business Markets
211
brand-building blocks (see Figure 8.1, left side) aligned with the branding ladder—
salience, performance, imagery, judgments, feelings, and resonance.
Brand Identity To achieve the right identity for a brand, the business marketer
must create brand salience with customers. Brand salience is tied directly to brand
awareness: How often is the brand evoked in different situations? What type of cues
or reminders does a customer need to recognize a brand? Brand awareness refers to
the customer’s ability to recall or recognize a brand under different conditions. The
goal here is to ensure that customers understand the particular product or service category where the brand competes by creating clear connections to the specific products or services that are solely under the brand name.
Brand Meaning Brand positioning involves establishing unique brand associations in the minds of customers to differentiate the brand and establish competitive
superiority.9 Although a multitude of different types of brand associations are possible, brand meaning can be captured by examining two broad categories: (1) brand
performance—the way in which the product or service meets customers’ more
functional needs (for example, quality, price, styling, and service effectiveness) and
(2) brand imagery—the ways in which the brand attempts to meet customers’ more
abstract psychological or social needs.
Brand positioning should incorporate both points of parity and points of difference in the customer value proposition (see Chapter 4). “Points of difference are
strong, favorable, unique brand associations that drive customers’ behavior; points
of parity are those associations where the brand ‘breaks even’ with competitors and
negates their intended points of difference.”10 Strong business-to-business brands like
Cisco, IBM, Google, and FedEx have clearly established strong, favorable (that is,
valuable to customers), and unique brand associations with customers.
Brand Response As a branding strategy is implemented, special attention should
be directed to how customers react to the brand and the associated marketing
activities. Four types of customer judgments are particularly vital to the creation of
a strong brand (in ascending order of importance):
1. Quality—the customer’s attitudes toward a brand’s perceived quality as well as
their perceptions of value and satisfaction;
2. Credibility—the extent to which the brand as a whole is perceived by customers
as credible in terms of expertise, trustworthiness, and likeability;
3. Consideration set—the degree to which customers find the brand to be an
appropriate option worthy of serious consideration;
4. Superiority—the extent to which customers believe that the brand offers unique
advantages over competitors’ brands.
Feelings relate to the customers’ emotional reaction to the brand and include
numerous types that have been tied to brand building, including warmth, fun,
9Kevin Lane Keller, Brian Sternthal, and Alice Tybout, “Three Questions You Need to Ask About Your Brand,” Harvard
Business Review 80 (September 2002): pp. 80–89.
10Webster and Keller, “A Roadmap for Branding,” p. 390.
212 Part IV
Formulating Business Marketing Strategy
excitement, and security. For example, Apple’s brand might elicit feelings of excitement (customers are energized by the brand and believe that the brand is cool); IBM
or FedEx may evoke feelings of security (the brand produces a feeling of comfort
or self-assurance); and Cisco’s branding campaign, “Welcome to the Human Network,” might elicit warmth (the brand makes customers feel peaceful). Cisco’s vice
president–corporate marketing, Marilyn Mersereau, says, “Instead of being a product
player with the ‘Powered by Cisco’ campaign, we’re trying to position Cisco to be a
platform for your life experience,” educating customers about the ways Cisco makes it
easier for people to connect with one another via the Web.11
Forging Brand Relationships An examination of the level of personal identification
and the nature of the relationship a customer has formed with the brand is the final step
in the brand-building process. Brand resonance represents the strength of the psychological bond that a customer has with a brand and the degree to which this connection translates into loyalty, attachment, and active engagement with the brand. Keller
observes, “Brand resonance reflects a completely harmonious relationship between
customers and the brand. . . . The strongest brands will be the ones to which those
consumers become so attached that they, in effect, become evangelists and actively seek
means to interact with the brand and share their experiences with others.”12
A Systems Model for Managing a Brand
To build and properly manage brand equity, Kevin Lane Keller and Donald R.
Lehman provide an integrative model that can be used to isolate key dimensions of
the brand management process.13 (See Figure 8.2.)
Company Actions A controllable element for the business marketer in creating
brand value concerns the type and amount of marketing expenditures (for example,
dollars spent on advertising or channel partner development) as well as the clarity,
distinctiveness, and consistency of the marketing strategy, over time and across activities. Strong brands receive proper R&D and marketing support and that support is
sustained over time.
What Customers Think and Feel As we have seen, the “brand ladder” follows an
order from awareness and brand associations to attachment and intense, active loyalty. Of course, the actions of competitors as well as environmental conditions can
influence how customers feel about a brand (for example, Microsoft poses a challenge
to Intuit, UPS challenges FedEx, and Apple’s iPhone poses a threat to Research in
Motion’s BlackBerry). Strong brands stay relevant and excel at providing the benefits
that matter the most to customers.14
What Customers Do The primary payoff from positive customer thoughts and
feelings is reflected in the purchases they make. Strong brands provide a host of
11“B to B’s Best Brands: Cisco,” B to B’s Best, 2007, accessed at http://www.btobonline.com on July 15, 2008.
12Keller, “Building Customer Brand-Based Equity,” p. 19.
13Kevin Lane Keller and Donald R. Lehman, “Brands and Branding: Research Findings and Future Priorities,”
Marketing Science 25 (November–December 2006): pp. 740–759.
14Kevin Lane Keller, “The Brand Report Card,” Harvard Business Review 78 (January–February 2000): pp. 147–157.
Chapter 8
FIGURE 8.2
Managing Products for Business Markets
213
A SYSTEMS MODEL OF BRAND ANTECEDENTS AND CONSEQUENCES
Company actions
Strategy
Direction
Programs
Specifics:
type, budget
Quality
Quality
Partners’
actions
(channels,
employees)
What customers think
and feel about a brand
Competitor’s
actions
Industry/environmental
conditions
Awareness
Associations
Attitude
Attachment
Activity
Satisfaction
What customers do
about a brand
Financial market impact
SOURCE: Reprinted by permission, Kevin Lane Keller and Donald R. Lehman, “Brands and Branding: Research Findings and
Future Priorities,” Marketing Science 25 (November/December 2006): p. 753. Copyright © 2006 INFORMS. Institute for
Operations Research and the Management Sciences (INFORMS), 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA.
214 Part IV
Formulating Business Marketing Strategy
B2B TOP PERFORMERS
Corporate Brand Personality Traits of a Successful
21st-Century Business
While a product brand personality relates to
consumer and user imagery for a specific product,
a corporate brand personality centers on the
human characteristics or traits of the employees
of the corporation as a whole. So, a corporate
brand personality is much broader and reflects
the values, words, and actions of organizational
members, individually and collectively.
Kevin Lane Keller and Keith Richey assert
that the corporate brand personality traits of a
successful 21st -century business can be defined on
three dimensions, thereby guiding employees and
influencing how the company will be perceived by
customers and key stakeholders:
• The “heart” of the company consists of two
traits: passionate and compassionate. The firm
must be passionate about serving customers
and demonstrate compassion for employees,
suppliers, partners, and members of the
communities in which it operates. (Through
its customer-centric focus and support of
numerous charitable initiatives, Southwest
Airlines demonstrates these traits.)
• The “mind” of the company consists of two
traits: creative and disciplined. A successful
firm must develop creative solutions for its
customers and display a disciplined approach
that is reflected in consistent actions across the
organization. (Based on their success in new
product development and superior strategy
execution, Apple and Intel demonstrate these
traits.)
• The “body” of the company includes two
traits: agile and collaborative. The successful
firm must have the agility to react quickly to
changing market requirements and emphasize
a collaborative approach that ensures effective
working relationships across functions and
with important stakeholders. (By responding
quickly to market changes and pursuing
relationship marketing strategies that are
embraced by customers, channel partners, and
alliance partners, Cisco aptly demonstrates
these traits.)
SOURCE: Kevin Lane Keller and Keith Richey, “The
Importance of Corporate Brand Personality Traits to a Successful
21st Century Business,” The Journal of Brand Management
14 (September–November 2006): pp. 74–81. Reprinted by
permission from Macmillan Publishers Ltd. Copyright 2006.
possible benefits to a firm such as greater customer loyalty, less vulnerability to competitive actions, higher profit margins, and greater cooperation and support from
channel partners.
How Financial Markets React A host of business-to-business companies have
launched brand-building initiatives, but do such investments generate positive returns? Some recent research on the brand attitude of buyers in evaluating computerrelated firms provides some answers.15 Brand attitude is a component and indicator
of brand equity. Brand attitude is defined as the percentage of organizational buyers
who have a positive image of a company minus those with a negative opinion. This
study found that changes in brand attitude are associated with stock market performance and tend to lead accounting financial performance (that is, an increase in brand
attitude will be reflected in improved financial performance three to six months later).
15David A. Aaker and Robert Jacobson, “The Value Relevance of Brand Attitude in High-Technology Markets,” Journal
of Marketing Research 38 (November 2001): pp. 485–493.
Chapter 8
Managing Products for Business Markets
215
In short, the research demonstrates that investments in building brand attitude for
high-technology firms do indeed pay off and increase the firm’s value.
In another intriguing study, Thomas J. Madden, Frank Fehle, and Susan Fournier
provide empirical evidence of the link between branding and shareholder value creation.16 They found that a portfolio of brands identified as strong by the Interbrand/
Business Week valuation method displays significant performance advantages compared
to the overall market. “Firms that have developed strong brands create value for their
shareholders by yielding returns that are greater in magnitude than a relevant market
benchmark, and perhaps more important, do so with less risk.”17
Product Quality and Customer Value
Rising customer expectations make product quality and customer value important strategic priorities. On a global scale, many international companies insist that suppliers,
as a prerequisite for negotiations, meet quality standards set out by the Geneva-based
International Standards Organization (ISO). These quality requirements, referred to as
ISO-9000 standards, were developed for the European Community but have gained
a global following.18 Certification requires a supplier to thoroughly document its quality-assurance program. The certification program is becoming a seal of approval to
compete for business not only overseas but also in the United States. For instance, the
Department of Defense employs ISO standards in its contract guidelines. Although Japanese firms continue to set the pace in the application of sophisticated quality-control
procedures in manufacturing, companies such as Kodak, AT&T, Xerox, Ford, HewlettPackard, Intel, GE, and others have made significant strides.
The quest for improved product quality touches the entire supply chain as these
and other companies demand improved product quality from their suppliers, large
and small. For example, GE has an organization-wide goal of achieving Six Sigma
quality, meaning that a product would have a defect level of no more than 3.4 parts
per million. Using the Six Sigma approach, GE measures every process, identifies
the variables that lead to defects, and takes steps to eliminate them. GE also works
directly to assist suppliers in using the approach. Overall, GE reports that Six Sigma
has produced striking results—cost savings in the billions and fundamental improvements in product and service quality. Recently, GE has centered its Six Sigma efforts
on functions that “teach customers,” such as marketing and sales.19
Meaning of Quality
The quality movement has passed through several stages.20 Stage one centered on conformance to standards or success in meeting specifications. But conformance quality
or zero defects do not satisfy a customer if the product embodies the wrong features.
16Thomas J. Madden, Frank Fehle, and Susan Fournier, “Brands Matter: An Empirical Demonstration of the Creation of
Shareholder Value Through Branding,” Journal of the Academy of Marketing Science 34 (2, 2006): pp. 224–235.
17Ibid., pp. 232–233.
18Wade Ferguson, “Impact of ISO 9000 Series Standards on Industrial Marketing,” Industrial Marketing Management
25 (July 1996): pp. 325–310.
19Erin White, “Rethinking the Quality-Improvement Program,” The Wall Street Journal, September 19, 2005, p. B3.
20Bradley T. Gale, Managing Customer Value: Creating Quality and Service That Customers Can See (New York: The Free
Press, 1994), pp. 25–30.
216 Part IV
Formulating Business Marketing Strategy
Stage two emphasized that quality was more than a technical specialty and that pursuing it should drive the core processes of the entire business. Particular emphasis was
given to total quality management and measuring customer satisfaction. However,
customers choose a particular product over competing offerings because they perceive it as providing superior value—the product’s price, performance, and service
render it the most attractive alternative. Stage three, then, examines a firm’s quality
performance relative to competitors and examines customer perceptions of the value
of competing products. The focus here is on market-perceived quality and value versus that of competitors. Moreover, attention shifts from zero defects in products to
zero defections of customers (that is, customer loyalty). Merely satisfying customers
who have the freedom to make choices is not enough to keep them loyal.21
Meaning of Customer Value
Strategy experts Dwight Gertz and Joõa Baptista suggest that “a company’s product
or service is competitively superior if, at price equality with competing products, target segments always choose it. Thus, value is defined in terms of consumer choice in
a competitive context.”22 In turn, the value equation includes a vital service component. For the service component, business marketing strategists must “recognize that
specifications aren’t just set by a manufacturer who tells the customer what to expect;
instead, consumers also may participate in setting specifications.” Frontline sales and
service personnel add value to the product offering and the consumption experience
by meeting or, indeed, exceeding the customer’s service expectations.23 Customer
value, then, represents a “business customer’s overall assessment of a relationship
with a supplier based on perceptions of benefits received and sacrifices made.”24
Benefits
Customer benefits take two forms (Figure 8.3):
1.
Core benefits—the core requirements (for example specified product quality) for
a relationship that suppliers must fully meet to be included in the customer’s
consideration set;
2.
Add-on benefits—attributes that differentiate suppliers, go beyond the basic
denominator provided by all qualified vendors, and create added value in a
buyer-seller relationship (for example, value-added customer service).
Sacrifices Consistent with the total cost perspective that business customers emphasize (Chapter 2), sacrifices include (1) the purchase price, (2) acquisition costs (for
example, ordering and delivery costs), and (3) operations costs (for example, defectfree incoming shipments of component parts reduces operations costs).
21Thomas O. Jones and W. Earl Sasser, “Why Satisfied Customers Defect,” Harvard Business Review 73 (November–
December 1995): pp. 88–99; and Richard L. Oliver, “Whence Customer Loyalty,” Journal of Marketing 63 (Special Issue
1999): pp. 33–44.
22Dwight L. Gertz and João P. A. Baptista, Grow to Be Great: Breaking the Downsizing Cycle (New York: The Free Press,
1995), p. 128.
23C. K. Prahalad and M. S. Krishnan, “The New Meaning of Quality in the Information Age,” Harvard Business Review
77 (September–October 1999): pp. 109–112. See also, C. K. Prahalad and Venkat Ramaswamy, The Future of Competition:
Co-Creating Unique Value with Customers (Boston: Harvard Business School Press, 2004).
24Ajay Menon, Christian Homburg, and Nikolas Beutin, “Understanding Customer Value in Business-to-Business
Relationships,” Journal of Business-to-Business Marketing 12 (2, 2005): p. 5. See also, Wolfgang Ulaga and Andreas Eggert,
“Value-Based Differentiation in Business Relationships: Gaining and Sustaining Key Supplier Status,” Journal of
Marketing 70 (January 2006): pp. 119–136.
Chapter 8
FIGURE 8.3
Managing Products for Business Markets
217
WHAT VALUE MEANS TO BUSINESS CUSTOMERS
Core
Benefits
Add-on
Customer Value
Price
Sacrifices
Acquisition
Costs
Operations
Costs
SOURCE: Adapted from Ajay Menon, Christian Homburg, and Nikolas Beutin, “Understanding Customer Value,” Journal
of Business-to-Business Marketing 12 (2, 2005): pp. 4–7.
What Matters Most? Based on a large study of nearly 1,000 purchasing managers
across a wide variety of product categories in the United States and Germany, Ajay
Menon, Christian Homburg, and Nikolas Beutin uncovered some rich insights into
customer value in business-to-business relationships.25
Add-on Benefits First, the research demonstrates that add-on benefits more strongly
influence customer value than do core benefits. Why? All qualified suppliers perform
well on core benefits, so add-on benefits tend to be the differentiator for customer
value as customers choose among competing offerings. Therefore, business marketers can use value-added services or joint working relationships that influence add-on
benefits to strengthen customer relationships. For example, a leading manufacturer of
tires for earthmoving equipment offers free consulting services that help customers
design maintenance procedures that yield significant cost savings.26
Trust Second, the study reinforces the vital role of trust in a business relationship
(see Chapter 4), demonstrating, in fact, that trust has a stronger impact on core benefits than product characteristics.
Reducing Customer’s Costs Third, the results highlight the importance of marketing
strategies that are designed to assist the customer in reducing operations costs. The
research team observes:
Ensuring on-time delivery of components and raw materials, getting involved
in the customer firm’s manufacturing and R&D strategy-making processes,
and deploying resources needed to ensure a smooth relationship with the customer will help reduce the customer’s operations costs.27
25Menon, Homburg, and Beutin, “Understanding Customer Value,” pp. 1–33.
26Das Narayandas, “Building Loyalty in Business Markets,” Harvard Business Review 83 (September–October 2005): p. 134.
27Menon, Homburg, and Beutin, “Understanding Customer Value,” p. 25.
218 Part IV
Formulating Business Marketing Strategy
By pursuing such initiatives, the business marketer does not have to rely solely on
price to demonstrate and deliver value to the customer.
Product Support Strategy: The Service Connection
The marketing function must ensure that every part of the organization focuses on
delivering superior value to customers. Business marketing programs involve a number of critical components that customers carefully evaluate: tangible products, service
support, and ongoing information services both before and after the sale. To provide value and to successfully implement these programs, the business marketing firm
must carefully coordinate activities among personnel in product management, sales,
and service.28 For example, to customize a product and delivery schedule for an important customer requires close coordination among product, logistics, and sales personnel. Moreover, some customer accounts might require special field-engineering,
installation, or equipment support, thereby increasing the required coordination
between sales and service units.
Post-purchase service is especially important to buyers in many industrial product
categories ranging from computers and machine tools to custom-designed component
parts. Responsibility for service support, however, is often diffused throughout various
departments, such as applications engineering, customer relations, or service administration. Significant benefits accrue to the business marketer who carefully manages and
coordinates product, sales, and service connections to maximize customer value.
Product Policy
Product policy involves the set of all decisions concerning the products and services
that the company offers. Through product policy, a business marketing firm attempts
to satisfy customer needs and to build a sustainable competitive advantage by capitalizing on its core competencies. This section explores the types of industrial product
lines and the importance of anchoring product-management decisions on an accurate
definition of the product market. A framework is also provided for assessing product
opportunities on a global scale.
Types of Product Lines Defined
Because product lines of industrial firms differ from those of consumer firms, classification is useful. Industrial product lines can be categorized into four types29:
1. Proprietary or catalog products. These items are offered only in certain
configurations and produced in anticipation of orders. Product-line decisions
concern adding, deleting, or repositioning products in the line.
2. Custom-built products. These items are offered as a set of basic units, with
numerous accessories and options. For example, NCR offers a line of retail
28Frank V. Cespedes, Concurrent Marketing: Integrating Product, Sales, and Service (Boston: Harvard Business School Press,
1995), pp. 58–85.
29Benson P. Shapiro, Industrial Product Policy: Managing the Existing Product Line (Cambridge, MA: Marketing Science
Institute, 1977), pp. 37–39.
Chapter 8
Managing Products for Business Markets
219
workstations used by large customers like Wal-Mart and 7-Eleven stores as well
as by smaller businesses. The basic workstation can be expanded to connect to
scanners, check readers, electronic payment devices, and other accessories to
meet a business’s particular needs. The firm’s wide array of products provides
retailers with an end-to-end solution, from data warehousing to the point-ofservice workstation at checkout. The marketer offers the organizational buyer
a set of building blocks. Product-line decisions center on offering the proper
mix of options and accessories.
3. Custom-designed products. These items are created to meet the needs of
one or a small group of customers. Sometimes the product is a unique unit, such
as a power plant or a specific machine tool. In addition, some items produced in
relatively large quantities, such as an aircraft model, may fall into this category.
The product line is described in terms of the company’s capability, and the
consumer buys that capability. Ultimately, this capability is transformed into a
finished good. For example, after canvassing airlines around the world, Airbus
detected enough interest in a super jumbo jet to proceed with development.30
4. Industrial services. Rather than an actual product, the buyer is purchasing
a company’s capability in an area such as maintenance, technical service, or
management consulting. (Special attention is given to services marketing in
Chapter 10.)
All types of business marketing firms confront product policy decisions, whether
they offer physical products, pure services (no physical product), or a product-service
combination.31 Each product situation presents unique problems and opportunities
for the business marketer; each draws on a unique capability. Product strategy rests
on the intelligent use of corporate capability.
Defining the Product Market
Accurately defining the product market is fundamental to sound product-policy decisions.32 Careful attention must be given to the alternative ways to satisfy customer
needs. For example, many different products could provide competition for personal
computers. Application-specific products, such as enhanced pocket pagers and smart
phones that send e-mail and connect to the Web, are potential competitors. A wide
array of information appliances that provide easy access to the Internet also pose a
threat. In such an environment, Regis McKenna maintains, managers “must look for
opportunities in—and expect competition from—every possible direction. A company
with a narrow product concept will move through the market with blinders on, and it
is sure to run into trouble.”33 By excluding products and technology that compete for
the same end-user needs, the product strategist can quickly become out of touch with
the market. Both customer needs and the ways of satisfying those needs change.
30Alex Taylor III, “Blue Skies for Airbus,” Fortune, April 1, 1999, pp. 102–108.
31Albert L. Page and Michael Siemplenski, “Product-Systems Marketing,” Industrial Marketing Management 12 (April
1983): pp. 89–99.
32For a related discussion on competitive analysis, see Beth A. Walker, Dimitri Kapelianis, and Michael D. Hutt,
“Competitive Cognition,” MIT Sloan Management Review 46 (Summer 2005): pp. 10–12.
33McKenna, Relationship Marketing, p. 184.
220 Part IV
Formulating Business Marketing Strategy
Product Market A product market establishes the distinct arena in which the business
marketer competes. Four dimensions of a market definition are strategically relevant:
1. Customer function dimension. This involves the benefits that are provided to
satisfy the needs of organizational buyers (for example, mobile messaging).
2. Technological dimension. There are alternative ways a particular function can be
performed (for example, cell phone, pager, notebook computer).
3. Customer segment dimension. Customer groups have distinct needs that must be
served (for example, sales representatives, physicians, international travelers).
4. Value-added system dimension. Competitors serving the market can operate along
a sequence of stages.34 The value-added system for wireless communication
includes equipment providers, such as Nokia and Motorola, and service
providers, like Verizon and AT&T. Analysis of the value-added system may
indicate potential opportunities or threats from changes in the system (for
example, potential alliances between equipment and service providers).
Planning for Today and Tomorrow Competition to satisfy the customer’s need
exists at the technology level as well as at the supplier or brand level. By establishing accurate product-market boundaries, the product strategist is better equipped to
identify customer needs, the benefits sought by the market segment, and the turbulent nature of competition at both the technology and supplier or brand levels. Derek
Abell offers these valuable strategy insights:
• Planning for today requires a clear, precise definition of the business—a delineation of target customer segments, customer functions, and the business approach to be taken; planning for tomorrow is concerned with how the business
should be redefined for the future.
• Planning for today focuses on shaping up the business to meet the needs of today’s customers with excellence. It involves identifying factors that are critical
to success and smothering them with attention; planning for tomorrow can entail reshaping the business to compete more effectively in the future.35
Seeing What’s Next Strategy experts also argue provocatively that many firms are
overlooking three important customer groups that may present the greatest opportunity for explosive growth36:
• Nonconsumers who may lack the specialized skills, training, or resources to purchase the product or service;
• Undershot customers for whom existing products are not good enough;
• Overshot customers for whom existing products provide more performance than
they can use.
34George S. Day, Strategic Market Planning: The Pursuit of Competitive Advantage (St. Paul, MN: West, 1984), p. 73.
35Derek F. Abell, “Competing Today While Preparing for Tomorrow,” Sloan Management Review 40 (Spring 1999):
p. 74.
36Clayton M. Christensen, Scott D. Anthony, and Erik A. Roth, Seeing What’s Next (Boston: Harvard Business School
Press, 2004), p. 5.
Chapter 8
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221
B2B TOP PERFORMERS
BASF: Using Services to Build a Strong Brand
BASF AG, headquartered in Germany, is the
world’s largest chemical company, with global
sales over $33 billion and North American sales of
$8 billion. Consistently ranked as one of Fortune’s
most admired global companies, the firm competes
in what many would describe as a commodity
business. Rather than pursue a low-total-cost
strategy and compete on price, BASF decided to
transform itself into an innovative service-oriented
company. Services, like R&D support or onsite field services, are hard for rivals to duplicate
and when well executed, provide the ultimate
differentiation strategy. To communicate its value
proposition to customers, the firm launched its
advertising campaign with the familiar tag line:
“We don’t make a lot of products you buy.
We make a lot of the products you buy better.”
A senior executive at BASF’s ad agency, Tony
Graetzer, describes the rationale for this
campaign, which has been recognized with
numerous awards: “Companies are frequently
viewed as tied on the quality of their products,
but they are never viewed as tied on the quality
of their services.” Winning companies provide
superior service. By emphasizing how it helps
make its customers’ products better and delivering
on its promises, the BASF brand has become
synonymous with customer partnerships and
technology leadership.
SOURCE: Bob Lamons, The Case for B2B Branding (Mason,
Ohio: Thomson, 2005), pp. 91–94.
Planning Industrial Product Strategy
Formulating a strategic marketing plan for an existing product line is the most vital
part of a company’s marketing planning efforts. Having identified a product market,
attention now turns to planning product strategy. Product-positioning analysis provides a useful tool for charting the strategy course.
Product Positioning
Once the product market is defined, a strong competitive position for the product
must be secured. Product positioning represents the place that a product occupies in
a particular market; it is found by measuring organizational buyers’ perceptions and
preferences for a product in relation to its competitors. Because organizational buyers
perceive products as bundles of attributes (for example, quality, service), the product
strategist should examine the attributes that assume a central role in buying decisions.
The Process37
Observe from Figure 8.4 that the positioning process begins by identifying the relevant set of competing products (Step 1) and defining those attributes that are determinant (Step 2)—attributes that customers use to differentiate among the alternatives
37This section is based on Harper W. Boyd Jr., Orville C. Walker Jr., and Jean-Claude Larréché, Marketing Management:
A Strategic Approach with a Global Orientation (Chicago: Irwin/McGraw-Hill, 1998), pp. 190–200.
222 Part IV
Formulating Business Marketing Strategy
FIGURE 8.4
STEPS IN THE PRODUCT-POSITIONING PROCESS
1. Identify the relevant set of competitive products
2. Identify the set of determinant attributes that customers use to differentiate among options
and determine the preferred choice
3. Collect information from a sample of existing and potential customers concerning their
ratings of each product on the determinant attributes
4. Determine the product’s current position versus competing offerings for each market segment
5. Examine the fit between preferences of market segments and current position of product
6. Select Positioning or Repositioning Strategy
SOURCE: Adapted with modifications from Harper W. Boyd Jr., Orville C. Walker Jr., and Jean-Claude Larréché,
Marketing Management: A Strategic Approach with a Global Orientation (Chicago: Irwin/McGraw-Hill, 1998), p. 197.
and that are important to them in determining which brand they prefer. In short,
then, determinant attributes are choice criteria that are both important and differentiating. Of course, some attributes are important to organizational buyers, but they
may not be differentiating. For example, safety might be an important attribute in the
heavy-duty truck market, but business market customers may consider the competing
products offered by Navistar, Volvo, and Mack Trucks as quite comparable on this
dimension. Durability, reliability, and fuel economy might constitute the determinant
attributes.
Step 3 involves collecting information from a sample of existing and potential
customers concerning how they perceive the various options on each of the determinant attributes. The sample should include buyers (particularly buying influentials)
from organizations that represent the full array of market segments the product strategist wishes to serve. After examining the product’s current position versus competing
offerings (Step 4), the analyst can isolate (1) the competitive strength of the product
in different segments and (2) the opportunities for securing a differentiated position
in a particular target segment (Step 5).
Isolating Strategy Opportunities
Step 6 involves the selection of the positioning or repositioning strategy. Here the
product manager can evaluate particular strategy options. First, for some attributes, the
product manager may wish to (1) pursue a strategy to increase the importance of an attribute to customers and (2) increase the difference between the competition’s and the
firm’s products. For example, the importance of an attribute such as customer training
Chapter 8
Managing Products for Business Markets
223
might be elevated through marketing communications emphasizing how the potential
buyer can increase its efficiency and employee performance through the firm’s training.
If successful, such efforts might move customer training from an important attribute to
a determinant attribute in the eyes of customers. Second, if the firm’s performance on
a determinant product attribute is truly higher than that of competitors—but the market perceives that other alternatives enjoy an edge—marketing communications can be
developed to bring perceptions in line with reality. Third, the competitive standing of a
product can be advanced by improving the firm’s level of performance on determinant
attributes that organizational buyers emphasize.
Product Positioning Illustrated 38
This product positioning approach was successfully applied to a capital equipment
product at a major corporation. The product that provided the focus of the analysis is
sold in three sizes to two market segments: end users and consulting engineers. Marketing research identified 15 attributes, including reliability, service support, company reputation, and ease of maintenance.
A New Strategy The research found that the firm’s brand enjoyed an outstanding rating on product reliability and service support. Both attributes were generally
determinant for the company against most competitors. To reinforce the importance
of both attributes, management decided to offer an enhanced warranty program. Both
end users and consulting engineers view warranties as important but not a point of
differentiation across competing brands. Management surmised, however, that by establishing a new warranty standard for the industry, the attribute could become determinant, adding to the brand’s leverage over competitors. In addition, management
felt that the new warranty program might also benefit the brand’s reputation on other
attributes such as reliability and company reputation.
Better Targeting The study also provided some surprises. Price was not nearly as
important to organizational buyers as management had initially believed. This suggested that there were opportunities to increase revenue through product differentiation and service support. Likewise, the research found that the firm’s brand dominated
all competitors in the large- and medium-sized products, but not in the small-sized
products. This particular product had an especially weak competitive position in the
consulting engineer segment. Special service support strategies were developed to
strengthen the product’s standing in this segment. Clearly, product positioning provides a valuable tool for designing creative strategies for business markets.
The Technology Adoption Life Cycle
After decades of being content with letters, telegrams, and telephones, consumers
have embraced voice-mail, e-mail, Internet browsers, and a range of information appliances. In each case, the conversion of the market came slowly. Once a particular threshold of consumer acceptance was achieved, there was a stampede. Geoffrey
38This section is based largely on Behram J. Hansotia, Muzaffar A. Shaikh, and Jagdish N. Sheth, “The Strategic
Determinancy Approach to Brand Management,” Business Marketing 70 (Fall 1985): pp. 66–69.
224 Part IV
Formulating Business Marketing Strategy
TABLE 8.1
THE TECHNOLOGY ADOPTION LIFE CYCLE: CLASSES OF CUSTOMERS
Customer
Profile
Technology enthusiasts
(innovators)
Interested in exploring the latest innovation, these consumers
possess significant influence over how products are perceived by
others in the organization but lack control over resource
commitments.
Desiring to exploit the innovation for a competitive advantage,
these consumers are the true revolutionaries in business and
government who have access to organizational resources but
frequently demand special modifications to the product that are
difficult for the innovator to provide.
Making the bulk of technology purchases in organizations,
these individuals believe in technology evolution, not
revolution, and seek products from a market leader with
a proven track record of providing useful productivity
improvements.
Pessimistic about their ability to derive any value from
technology investments, these individuals represent a sizable
group of customers who are price sensitive and reluctantly
purchase high-tech products to avoid being left behind.
Rather than potential customers, these individuals are everpresent critics of the hype surrounding high-technology
products.
Visionaries
(early adopters)
Pragmatists
(early majority)
Conservatives
(late majority)
Skeptics (laggards)
SOURCE: Adapted from Geoffrey A. Moore, Inside the Tornado: Marketing Strategies from Silicon Valley’s Cutting Edge (New
York: HarperCollins, 1995), pp. 14–18.
Moore defines discontinuous innovations as “new products or services that require
the end-user and the marketplace to dramatically change their past behavior, with the
promise of gaining equally dramatic new benefits.”39 During the past quarter century,
discontinuous innovations have been common in the computer-electronics industry,
creating massive new spending, fierce competition, and a whole host of firms that are
redrawing the boundaries of the high-technology marketplace.
A popular tool with strategists at high-technology firms is the technology adoption life cycle—a framework developed by Geoffrey Moore, a leading consultant to
Hewlett-Packard and a host of other Silicon Valley firms.
Types of Technology Customers
Fundamental to Moore’s framework are five classes of customers who constitute the
potential market for a discontinuous innovation (Table 8.1). Business marketers can
benefit by putting innovative products in the hands of technology enthusiasts. They
serve as a gatekeeper to the rest of the technology life cycle, and their endorsement is
needed for an innovation to get a fair hearing in the organization. Whereas technology
enthusiasts possess influence, they do not have ready access to the resources needed
to move an organization toward a large-scale commitment to the new technology.
39Geoffrey A. Moore, Inside the Tornado: Marketing Strategies from Silicon Valley’s Cutting Edge (New York: HarperCollins,
1995), p. 13.
Chapter 8
Managing Products for Business Markets
225
INSIDE BUSINESS MARKETING
The Gorilla Advantage in High-Tech Markets
High-tech companies that can get their products
designed into the very standards of the market
have enormous influence over the future direction
of that market. For example, all PC-based software
has to be Microsoft- and Intel-compatible. All
networking solutions must be compatible with
Cisco Systems’ standards; all printers must be
Hewlett-Packard–compatible. This is the essence
of gorilla power in high-tech markets that firms
such as Microsoft, Intel, Cisco, and HewlettPackard enjoy. The gorilla advantage allows these
market leaders to
• Attract more customers by enjoying better press
coverage and shorter sales cycles just because
information technology managers expect it to
be the winner;
• Keep more customers because the cost of
switching is high for customers and the cost of
entry is high for competitors;
• Drive costs down by shifting some costly
enhancements that customers demand to
suppliers while retaining control of the critical
components of value creation;
• Keep profits up because business partners place a
priority on developing complementary products
and services that make the whole product of the
market leader worth more to customers than
competing products are worth.
The Internet presents an explosive area of
growth in many sectors of the high-tech market
as firms square off to gain a leadership position
in e-procurement, wireless technologies, supply
chain integration, and Web-focused security. The
gorilla games are just beginning!
SOURCE: Geoffrey A. Moore, Paul Johnson, and Tom Kippola,
The Gorilla Game: An Investor’s Guide to Picking Winners in HighTechnology (New York: HarperBusiness, 1998), pp. 43–70.
By contrast, visionaries have resource control and can often be influential in publicizing
an innovation’s benefits and giving it a boost during the early stages of market development. However, visionaries are difficult for a marketer to serve because each demands
special and unique product modifications. Their demands can quickly tax a technology
firm’s R&D resources and stall the market penetration of the innovation.
The Chasm Truly innovative products often enjoy a warm welcome from early technology enthusiasts and visionaries, but then sales falter and often even plummet. Frequently, a chasm develops between visionaries who are intuitive and support revolution
and the pragmatists who are analytical, support evolution, and provide the pathway to
the mainstream market. The business marketer that can successfully guide a product
across the chasm creates an opportunity to gain acceptance with the mainstream market
of pragmatists and conservatives. As Table 8.1 relates, pragmatists make most technology purchases in organizations, and conservatives include a sizable group of customers
who are hesitant to buy high-tech products but do so to avoid being left behind.
Strategies for the Technology Adoption Life Cycle
The fundamental strategy for crossing the chasm and moving from the early market
to the mainstream market is to provide pragmatists with a 100 percent solution to
their problems (Figure 8.5). Many high-technology firms err by attempting to provide something for everyone while never meeting the complete requirements of any
226 Part IV
Formulating Business Marketing Strategy
Text not available due to copyright restrictions
particular market segment. Pragmatists seek the whole product—the minimum set of
products and services that provide them with a compelling reason to buy. Geoffrey
Moore notes that “the key to a winning strategy is to identify a simple beachhead of
pragmatist customers in a mainstream market segment and to accelerate the formation of 100 percent of their whole product. The goal is to win a niche foothold in the
mainstream as quickly as possible—that is what is meant by crossing the chasm.”40
The Bowling Alley
In technology markets, each market segment is like a bowling pin, and the momentum from hitting one segment successfully carries over into surrounding segments.
The bowling alley represents a stage in the adoption life cycle where a product gains
acceptance from mainstream market segments but has yet to be adopted widely.
Consider the evolution of strategy for Lotus Notes.41 When first introduced,
Notes was offered as a new paradigm for corporate-wide communication. To cross
into the mainstream market, the Lotus team shifted the product’s focus from an enterprise-wide vision of corporate communication to specific solutions for particular business functions. The first niche served was the global account-management function
of worldwide accounting and consulting firms. The solution was enhanced account
activity coordination for highly visible products. This led to a second niche—global
account management for sales teams, where enhanced coordination and information
sharing spur productivity.
40Ibid., p. 22. For a related discussion, see Clayton M. Christensen and Michael E. Raynor, The Innovator’s Solution: Creat-
ing and Sustaining Successful Growth (Boston: Harvard Business School Press, 2003), pp. 73–95.
41Moore, Inside the Tornado, pp. 35–37.
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227
A Focused Strategy A logical next step for Lotus was movement into the customer
service function, where openly sharing information can support creative solutions
to customer problems. Successful penetration of these segments created another
opportunity—incorporating the customer into the Notes loop. Note the key lesson
here: A customer-based, application-focused strategy provides leverage so that a victory in one market segment cascades into victories in adjacent market segments.
The Tornado
Although economic buyers who seek particular solutions are the key to success in the
bowling alley, technical or infrastructure buyers in organizations can spawn a tornado
(see Figure 8.5). Information technology (IT) managers are responsible for providing efficient and reliable infrastructures—the systems organizational members use to
communicate and perform their jobs. They are pragmatists, and they prefer to buy
from an established market leader.
IT professionals interact freely across company and industry boundaries and
discuss the ramifications of the latest technology. IT managers watch each other
closely—they do not want to be too early or too late. Often, they move together and
create a tornado. Because a massive number of new customers are entering the market
at the same time and because they all want the same product, demand dramatically
outstrips supply and a large backlog of customers can appear overnight. At a critical
stage, such market forces have surrounded Hewlett-Packard’s laser and inkjet printers, Microsoft’s Windows products, Intel’s Pentium microprocessors, and Research
in Motion’s BlackBerry device.
Tornado Strategy The central success factors for the tornado phase of the adoption life cycle differ from those that are appropriate for the bowling alley. Rather than
emphasizing market segmentation, the central goal is to gear up production to capitalize on the opportunity the broad market presents. In its printer business, HewlettPackard demonstrated the three critical priorities during a tornado42:
1. “Just ship.”
2. Extend distribution channels.
3. Drive to the next lower price point.
First, Hewlett-Packard’s quality improvement process allowed it to significantly
increase production—first with laser printers, and later with inkjet printers—with few
interruptions. Second, to extend market coverage, H-P began to sell its laser printers
through PC dealer channels and extended its distribution channels for inkjet printers
to computer superstores, office superstores, mail order, and, more recently, to price
clubs and other consumer outlets. Third, H-P drove down the price points for its
printers—moving inkjet printers below $1,000, then below $500, and then well below
that. As this example demonstrates, tornado strategy emphasizes product leadership
and operational excellence in manufacturing and distribution.
42Ibid., p. 81. See also Stephen Kreider Yoder, “Shaving Back: How H-P Used Tactics of the Japanese to Beat Them at
Their Game,” The Wall Street Journal, September 8, 1994, pp. A1, A6.
228 Part IV
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Main Street
This stage of the technology adoption life cycle represents a period of aftermarket
development. The frantic waves of mass-market adoption of the product begin to
subside. Competitors in the industry have increased production, and supply now exceeds demand. Moore points out that “the defining characteristic of Main Street is
that continued profitable market growth can no longer come from selling the basic
commodity to new customers and must come instead from developing niche-specific
extensions to the basic platform for existing customers.”43
Main Street Strategy The goal here is to develop value-based strategies targeted
to particular end-user segments. H-P, for example, matches its printers to the special
needs of different segments of home-office users by offering
• A compact portable printer for those users who are space-constrained;
• The OfficeJet printer-fax for those who do not yet own a fax;
• A high-performance color printer for those who create commercial flyers.
Main Street strategy emphasizes operational excellence in production and distribution as well as finely tuned market segmentation strategies. What signals the end of
the technology adoption life cycle? A discontinuous innovation appears that incorporates breakthrough technology and promises new solutions for customers.
Summary
Some of the most valuable and enduring global brands belong to business-to-business
firms. The power of a brand resides in the minds of customers through what they
have experienced, seen, and heard about the brand over time. The customer-based
brand equity model consists of four steps: establishing the right brand identity, defining the meaning of the brand through unique brand associations, developing responsive marketing programs to elicit a positive brand response from customers, and
building brand relationships with customers, marked by loyalty and active engagement. Research vividly demonstrates that investments in building a strong brand yield
a positive payoff in the financial performance of the firm.
Conceptualizing a product must go beyond mere physical description to include
all the benefits and services that provide value to customers. The unifying goal for the
business marketer: Provide superior market-perceived quality and value versus competitors.
To a business customer, value involves a trade-off between benefits and sacrifices.
Business marketers can strengthen customer relationships by providing value-added
services and helping customers reduce operations costs. A carefully coordinated
product strategy recognizes the role of various functional areas in providing value to
business customers. Special attention should be given to synchronizing the activities
among the product-management, sales, and service units.
Industrial product lines can be broadly classified into (1) proprietary or catalog
items, (2) custom-built items, (3) custom-designed items, and (4) industrial services.
43Moore, Inside the Tornado, p. 111.
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229
Product management can best be described as the management of capability. In
monitoring product performance and in formulating marketing strategy, the business marketer can profitably use product-positioning analysis. By isolating a product’s
competitive standing in a market, positioning analysis provides strategy insights to the
planner. A product attribute is determinant if it is both important and differentiating.
Rapidly changing high-technology markets present special opportunities and
challenges for the product strategist. The technology adoption life cycle includes five
categories of customers: technology enthusiasts, visionaries, pragmatists, conservatives, and skeptics. New products gain acceptance from niches within the mainstream
market, progress from segment to segment like one bowling pin knocking over another, and, if successful, experience the tornado of general, widespread adoption by
pragmatists. Importantly, the technology adoption life cycle calls for different marketing strategies at different stages.
Discussion Questions
1. Evaluate this statement: A brand is much more than a name, and
branding is a strategy problem, not a naming problem.
2. Identify two business-to-business brands that you would deem to be
strong and distinctive. Next, describe the characteristics of each brand
that tend to set it apart from rival brands.
3. Using the customer-based brand equity framework as a guide, describe
the distinctive components of Apple’s brand strategy.
4. Describe why a brand-positioning strategy should include points of
difference and points of parity. Provide an illustration to support your case.
5. Regis McKenna notes that “no company in a technology-based
industry is safe from unanticipated bumps in the night.” In recent years,
many industries have been jolted by technological change. In such an
environment, what steps can a product strategist take?
6. Bradley Gale, managing director of The Strategic Planning Institute,
says: “People systematically knock out income statements and balance
sheets, but they often don’t monitor the nonfinancial factors that
ultimately drive their financial performance. These nonfinancial factors
include ‘relative customer-perceived quality’: how customers view the
marketer’s offering versus how they perceive competitive offerings.”
Explain.
7. Distinguish among catalog items, custom-built items, custom-designed
items, and services. Explain how marketing requirements vary across
these classifications.
8. A particular product strategy will stimulate a response from the market and
a corresponding response from competitors. Which specific features of the
competitive environment should the business marketing strategist evaluate?
230 Part IV
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9. Moving across the technology adoption life cycle, compare and contrast
technology enthusiasts with pragmatists. Give special attention to
the strategy guidelines that the marketing strategist should follow in
reaching customers that fall into these two adoption categories.
10. Firms like Microsoft, Apple, Sony, and Intel have experienced a burst
of demand for some of their products. During the “tornado” for a hightech product, the guiding principle of operations for a market leader is
“Just ship.” Explain and discuss the changes in marketing strategy the
firm must follow after the tornado.
Internet Exercise
1. United Technologies Corporation (UTC) provides a broad range of
high-technology products and support services to the building systems
and aerospace industries. Go to http://www.utc.com and identify UTC’s
major businesses (product lines).
CASE
Cisco TelePresence: The “As if you were there” Technology44
Research demonstrates that visual clues—such as raising an eyebrow or slumping the
shoulders—comprise more than 50 percent of the information conveyed in a conversation. Unfortunately, until now, video technologies failed to provide the necessary fidelity to transmit these revealing clues effectively. However, Cisco Systems has created a
two-way video communications system that preserves all those important nuances, in the
process pioneering a new form of digital communications that rivals the effectiveness of
in-person meetings. Twenty-five patents are pending for the Cisco TelePresence “as if
you were there” technology. One industry analyst observed that video conferencing is like
riding a 10-speed bike while TelePresence is like driving a Ferrari.
Benefits
By reducing the need for in-person face-to-face meetings, organizations can reap significant benefits from reduced travel costs, greater productivity, and better relationships with customers and partners. For global companies, executive travel is disruptive,
costly, and time-consuming. Why travel to meet in person if you can communicate
just as effectively through TelePresence?
The Price Tag
The Cisco TelePresence 3000 costs approximately $300,000 for each installation,
or room, plus additional support costs. By contrast, the Cisco TelePresence 1000 is
priced at $80,000 per room. As the price of key TelePresence technologies, such as
plasma screens and broadband connections, will almost certainly continue to decline
rapidly, Cisco believes that the system will enjoy a wider array of applications, making
it affordable for more organizations and even for individuals from home.
Discussion Questions
1. Using the technology life cycle as a framework, propose particular marketing
strategies that Cisco might employ to “cross the chasm.”
2. Identify particular market segments that Cisco might target for the
TelePresence product.
44“Cisco Brings ‘In-Person’ Realism to Virtual Communications,” accessed at http://www.cisco.com/en/US/products/
ps7060/index.html on July 15, 2008.
231
CHAPTER
9
Managing Innovation and New
Industrial Product Development
The long-term competitive position of most organizations is tied to their ability to
innovate—to provide existing and new customers with a continuing stream of new
products and services. Innovation is a high-risk and potentially rewarding process.
After reading this chapter, you will understand:
1. the strategic processes, both formal and informal, through which product
innovations take shape.
2. the characteristics of innovation winners in high-technology markets.
3. the factors that drive a firm’s new product performance.
4. the determinants of new product success and timeliness.
232
Chapter 9
Managing Innovation and New Industrial Product Development
233
With his American swagger and his hair bleached white, Tony Fadell stood
out at button-down Philips Electronics, where he led an in-house operation
designing . . . consumer electronics devices. It was there that he came up with
the idea of marrying a Napster-like music store with a hard drive-based MP3
player. He shopped the concept around the Valley before Apple’s Jon Rubenstein snapped it up and put Fadell in charge of the engineering team that built
the first iPod.1
Once prototypes were developed, CEO Steve Jobs worked closely with the team and
was instrumental in molding the shape, feel, and design of the device.2 “Ambitious
and charismatic (and no longer a bleached blond), Tony now runs the hardware division that makes two of Apple’s three product lines: the iPod and the iPhone.”3
Many firms derive much of their sales and profits from recently introduced products. Indeed, best-practice firms generate about 48 percent of sales and 45 percent of
profits from products commercialized in the past five years.4 But the risks of product
innovation are high; significant investments are involved and the likelihood of failure
is high. With shortening product life cycles and accelerating technological change,
speed and agility are central to success in the innovation battle.
This chapter examines product innovation in the business marketing environment. The first section provides a perspective on the firm’s management of innovation. Second, product innovation is positioned within a firm’s overall technological
strategy. Third, key dimensions of the new-product-development process are examined. Attention centers on the forces that drive successful new product performance
in the firm. The final section of the chapter explores the determinants of new product
success and timeliness.
The Management of Innovation
Management practices in successful industrial firms reflect the realities of the innovation process itself. James Quinn asserts that “innovation tends to be individually
motivated, opportunistic, customer responsive, tumultuous, nonlinear, and interactive in its development. Managers can plan overall directions and goals, but surprises
are likely to abound.”5 Clearly, some new-product-development efforts are the outgrowth of deliberate strategies (intended strategies that become realized), whereas
others result from emergent strategies (realized strategies that, at least initially, were
never intended).6 Bearing little resemblance to a rational, analytical process, many
strategic decisions involving new products are rather messy, disorderly, and disjointed
processes around which competing organizational factions contend. In studying
1“After Steve Jobs: Apple’s Next CEO—Tony Fadell (2),” June 26, 2008, accessed at http://money.cnn.com/galleries/2008/
fortune/0806/gallery.apple_jobs_successors.fortune/2.html on July 16, 2008.
2Leander Kahney, “Inside Look at Birth of iPod,” July 21, 2004, accessed at http://www.wired.com/gadgets/mac/
news/2004/07/64286 on June 3, 2008.
3“After Steve Jobs: Apple’s Next CEO.”
4 John Hauser, Gerald J. Tellis, and Abbie Griffin, “Research on Innovation: A Review and Agenda for Marketing Science,”
Marketing Science 25 (November–December 2006): p. 707.
5James B. Quinn, “Managing Innovation: Controlled Chaos,” Harvard Business Review 63 (May–June 1985): p. 83.
6Henry Mintzberg and James A. Walton, “Of Strategies, Deliberate and Emergent,” Strategic Management Journal
6 ( July–August 1985): pp. 257–272.
234 Part IV
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successful innovative companies such as Sony, AT&T, and Hewlett-Packard, Quinn
characterized the innovation process as controlled chaos:
Many of the best concepts and solutions come from projects partly hidden or
“bootlegged” by the organization. Most successful managers try to build some
slack or buffers into their plans to hedge their bets. . . . They permit chaos
and replications in early investigations, but insist on much more formal planning and controls as expensive development and scale-up proceed. But even at
these later stages, these managers have learned to maintain flexibility and to
avoid the tyranny of paper plans.7
Some new products result from a planned, deliberate process, but others follow a more
circuitous and chaotic route.8 Why? Research suggests that strategic activity within a large
organization falls into two broad categories: induced and autonomous strategic behavior.9
Induced Strategic Behavior
Induced strategic behavior is consistent with the firm’s traditional concept of strategy.
It takes place in relationship to its familiar external environment (for example, its customary markets). By manipulating various administrative mechanisms, top management can
influence the perceived interests of managers at the organization’s middle and operational
levels and keep strategic behavior in line with the current strategy course. For example,
existing reward and measurement systems may direct managers’ attention to some market opportunities and not to others. Examples of induced strategic behavior or deliberate
strategies might emerge around product-development efforts for existing markets.
Autonomous Strategic Behavior
During any period, most strategic activity in large, complex firms is likely to fit into
the induced behavior category. However, large, resource-rich firms are likely to possess a pool of entrepreneurial potential at operational levels, which expresses itself in
autonomous strategic initiatives. The 3M Company encourages its technical employees to devote 15 percent of their work time to developing their own ideas. Through
the personal efforts of individual employees, new products are born. For example,
• Gary Fadell is the engineering genius behind the iPod.
• Art Fry championed Post-it notes at 3M.
• P. D. Estridge promoted the personal computer at IBM.
• Stephanie L. Kwolek advanced the bulletproof material Kevlar at DuPont.
• Michimosa Fujino championed the HondaJet (see Figure 9.1) that may shake
up the small-jet business with the same value proposition—high fuel efficiency
and sleek design—that the first-generation Honda Civic used to rattle U.S. auto
manufacturers 30 years ago.10
7Quinn, “Managing Innovation,” p. 82.
8This section is based on Michael D. Hutt, Peter H. Reingen, and John R. Ronchetto Jr., “Tracing Emergent Processes in
Marketing Strategy Formation,” Journal of Marketing 52 (January 1988): pp. 4–19.
9Robert A. Burgelman, “A Process Model of Internal Corporate Venturing in the Diversified Major Firm,” Administrative
Science Quarterly 28 (April 1983): pp. 223–244.
10 This discussion is based on Norihiko Shirouzu, “Mr. Fujino’s Bumpy Flight Lands Honda in the Jet Age,” The Wall
Street Journal, June 18, 2007, pp. B1 and B3.
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Text not available due to copyright restrictions
235
236 Part IV
Formulating Business Marketing Strategy
“Civic of the Sky” Senior executives at Honda and industry analysts alike believe
that the HondaJet can quickly gain 10 percent of the small-jet market and turn a
profit in three to four years. Compared to the popular Cessna Citation CJ1+ that seats
four to six passengers, the HondaJet is priced at $3.65 million, $880,000 below the
Cessna, uses about 22 percent less fuel, has 20 percent more passenger cabin space,
and boasts the fit and finish of a luxury car.
Now in his mid-forties, Mr. Fujino has tirelessly promoted his idea for two decades.
He succeeded in keeping the project alive by nurturing ties to senior executives and by
tying his risk-taking to Honda’s broader efforts to rekindle a spirit of innovation. Although formal reviews of the jet project have been intense and even “ugly” at times, he
persevered because, behind the scenes, some senior executives enthusiastically supported
his efforts. A crucial turning point for the project came at a critical board meeting where
Mr. Fujino was presenting the idea. After an awkward start and what he describes as a
“cold glaze” from some board members, “he was able to drive home the jet’s potential
when he analogized it to Honda’s breakthrough car, calling the jet a ‘Civic of the sky.’”11
Autonomous strategic behavior is conceptually equivalent to entrepreneurial
activity and introduces new categories of opportunity into the firm’s planning process.
Managers at the product-market level conceive of market opportunities that depart from
the current strategy course, then engage in product-championing activities to mobilize
resources and create momentum for further development of the product. Emphasizing
political rather than administrative channels, product champions question the firm’s current concept of strategy and, states Robert Burgelman, “provide top management with
the opportunity to rationalize, retroactively, successful autonomous strategic behavior.”12 Through these political mechanisms, successful autonomous strategic initiatives,
or emergent strategies, can become integrated into the firm’s concept of strategy.
Clayton M. Christensen and Michael E. Raynor observe:
Emergent strategies result from managers’ responses to problems or opportunities that were unforeseen in the analysis and planning stages of the
deliberate strategy making process. When the efficacy of that strategy . . .
is recognized, it is possible to formalize it, improve it, and exploit it, thus
transforming an emergent strategy into a deliberate one.13
Product Championing and the Informal Network
Table 9.1 highlights several characteristics that may distinguish induced from autonomous strategic behavior. Autonomous strategic initiatives involve a set of actors
and evoke strategic dialogue different from that found in induced initiatives. An individual manager, the product champion, assumes a central role in sensing an opportunity and in mobilizing an informal network to explore the idea’s technical feasibility
and market potential. A product champion is an organization member who creates,
defines, or adopts an idea for an innovation and is willing to assume significant
risk (for example, position or prestige) to successfully implement the innovation.14
11 Ibid., p. B3.
12 Robert A. Burgelman, “Corporate Entrepreneurship and Strategic Management: Insights from a Process Study,”
Management Science 29 (December 1983): p. 1352.
13Clayton M. Christensen and Michael E. Raynor, The Innovator’s Solution: Creating and Sustaining Successful Growth
(Boston: Harvard Business School Press, 2003), pp. 215–216.
14Modesto A. Maidique, “Entrepreneurs, Champions, and Technological Innovations,” Sloan Management Review 21 (Spring
1980): pp. 59–70; see also Jane M. Howell, “Champions of Technological Innovation,” Administrative Science Quarterly 35
(June 1990): pp. 317–341.
Chapter 9
TABLE 9.1
Managing Innovation and New Industrial Product Development
237
INDUCED VERSUS AUTONOMOUS STRATEGIC BEHAVIOR: SELECTED CHARACTERISTICS
OF THE MARKETING STRATEGY FORMULATION PROCESS
Induced
Autonomous
Activation of the strategic
decision process
An individual manager defines a
market need that converges on the
organization’s concept of strategy.
An individual manager defines a
market need that diverges from the
organization’s concept of strategy.
Nature of the screening
process
A formal screening of technical and
market merit is made using established administrative procedures.
An informal network assesses
technical and market merit.
Type of innovation
Incremental (e.g., new product
development for existing markets uses
existing organizational resources).
Major (e.g., new product development projects require new combinations of organizational resources).
Nature of communication
Consistent with organizational
work flow.
Departs from organizational work
flow in early phase of decision process.
Major actors
Prescribed by the regular channel
of hierarchical decision making.
An informal network emerges based
on mobilization efforts of the
product champion.
Decision roles
Roles and responsibilities for participants in the strategy formulation
process are well defined.
Roles and responsibilities of participants are poorly defined in the initial
phases but become more formalized
as the strategy formulation process
evolves.
Implications for strategy
Strategic alternatives are considered
and commitment to a particular strategic course evolves.
Commitment to a particular strategic
course emerges in the early phases
through the sponsorship efforts of
the product champion.
SOURCE: Adapted from Michael D. Hutt, Peter H. Reingen, and John R. Ronchetto Jr., “Tracing Emergent Processes in Marketing, Strategy
Formation,” Journal of Marketing 52 (January 1988): pp. 4–19. See also Clayton M. Christensen and Michael E. Raynor, The Innovator’s Solution:
Creating and Sustaining Successful Growth (Boston: Harvard Business School Press, 2003), pp. 213–231.
Senior managers at 3M do not commit to a project unless a champion emerges and do
not abandon the effort unless the champion “gets tired.” Emphasizing a rich culture of
innovation embraced by all employees, senior executives at 3M also encourage product-championing behavior and calculated risk-taking. Moreover, they tolerate what 3M
employees call “well-intentioned” failures.15
Compared with induced strategic behavior, autonomous or entrepreneurial
initiatives are more likely to involve a communication process that departs from the
regular work flow and the hierarchical decision-making channels. The decision roles
and responsibilities of managers in this informal network are poorly defined in the
early phases of the strategy-formulation process but become more formalized as
the process evolves. Note in Table 9.1 that autonomous strategic behavior entails a
creeping commitment toward a particular strategy course. By contrast, induced strategic initiatives are more likely to involve administrative mechanisms that encourage
a more formal and comprehensive assessment of strategic alternatives at various levels
in the firm’s planning hierarchy.
15 George S. Day, “Managing the Market Learning Process,” Journal of Business & Industrial Marketing 17 (4, 2002): p. 246.
238 Part IV
Formulating Business Marketing Strategy
Conditions Supporting Corporate Entrepreneurship16
Entrepreneurial initiatives cannot be precisely planned but they can be nurtured and
encouraged. First, the availability of appropriate rewards can enhance a manager’s
willingness to assume the risks associated with entrepreneurial activity. Second, as 3M
illustrates, senior management can assume an instrumental role in fostering innovation
by promoting entrepreneurial initiatives and encouraging calculated risk-taking. Third,
resource availability, including some slack time, is needed to provide entrepreneurs
with some degrees of freedom to explore new possibilities. 3M encourages scientists to
devote up to 15 percent of their time to particular projects that they find personally interesting. Fourth, an organizational structure supporting corporate entrepreneurship
provides the administrative mechanisms that bring more voices to the innovation process across the firm and allow ideas to be evaluated, selected, and implemented.17
What Motivates Entrepreneurs? Recent research identifies two additional dimensions that motivate corporate entrepreneurs: (1) intrinsic motivation (the drive originating within oneself) and (2) work design (for example, the availability of challenging
projects; opportunities to interact directly with customers and other entrepreneurs).
Matthew R. Marvel and his research colleagues describe what technical corporate
entrepreneurs desire in their job:
They want their innovative efforts to be connected to customer problems that need
to be solved—and important customer problems at that. To understand these problems, they need contact with customers. To get breakthrough ideas on how to solve
these problems, they also need contact with other world-class technologists.18
Managing Technology
Kodak, Lockheed, IBM, and the management teams of other corporations failed to
recognize the major technological opportunity that xerographic copying presented.
These firms were among the many that turned down the chance to participate with
the small and unknown Haloid Company in refining and commercializing this technology. In the end, Haloid pursued it alone and transformed this one technological
opportunity into the Xerox Corporation. Among the “tales of high tech,” this remains
a classic.19 Technological change, Michael Porter asserts, is “a great equalizer, eroding the competitive advantage of even well-entrenched firms and propelling others to
the forefront. Many of today’s great firms grew out of technological changes that they
were able to exploit.”20 Clearly, the long-run competitive position of most businessto-business firms depends on their ability to manage, increase, and exploit their technology base. This section explores the nature of development projects, the disruptive
16 This section is based on Matthew R. Marvel, Abbie Griffin, John Hebda, and Bruce Vojak, “Examining the Technical Corporate
Entrepreneurs’ Motivation: Voices from the Field,” Entrepreneurship Theory and Practice, 31 (September 2007): pp. 753–768.
17 Gary Hamel, “The Why, What, and How of Management Innovation,” Harvard Business Review 84 (February 2006): pp. 72–84.
18Marvel, Griffin, Hebda, and Vojak, “Examining the Technical Corporate Entrepreneurs’ Motivation,” p. 764.
19For a related discussion of Xerox’s technology blunders, see Andrew Hargadon, How Breakthroughs Happen: The Surprising
Truth about How Companies Innovate (Boston: Harvard Business School Press, 2003), pp. 168–182.
20Michael E. Porter, “Technology and Competitive Advantage,” Journal of Business Strategy 6 (Winter 1985): p. 60; and
Tamara J. Erickson, John F. Magee, Philip A. Roussel, and Komol N. Saad, “Managing Technology as Business Strategy,”
Sloan Management Review 31 (Spring 1990): pp. 73–83.
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Managing Innovation and New Industrial Product Development
239
innovation model, and the defining attributes of successful innovators in fast-changing
high-technology markets.
Classifying Development Projects
A first step in exploring the technology portfolio of a firm is to understand the different forms that development projects can take. Some development projects center on
improving the manufacturing process, some on improving products, and others on both
process and product improvements. All of these represent commercial development
projects. By contrast, research and development is the precursor to commercial development. A firm’s portfolio can include four types of development projects.21
1. Derivative projects center on incremental product enhancements (for example,
a new feature), incremental process improvements (for example, a lower-cost
manufacturing process), or incremental changes on both dimensions.
Illustration: A feature-enhanced or cost-reduced Canon color copier.
2. Platform projects create the design and components shared by a set of
products. These projects often involve a number of changes in both the product
and the manufacturing process.
Illustrations: A common motor in all Black & Decker hand tools; multiple
applications of Intel’s microprocessor.
3. Breakthrough projects establish new core products and new core processes
that differ fundamentally from previous generations.
Illustrations: Computer disks and fiber-optic cable created new product
categories.
4. Research and development is the creation of knowledge concerning new
materials and technologies that eventually leads to commercial development.22
Illustration: Cisco Systems’ development of communications technology that
underlies its networking systems used by diverse customers like retailers,
banks, and hotel chains.
A Product-Family Focus
A particular technology may provide the foundation or platform for several products.
For example, Honda applies its multivalve cylinder technology to power-generation
equipment, cars, business jets, motorcycles, and lawn mowers.23 Products that share
a common platform but have different specific features and enhancements required
for different sets of consumers constitute a product family.24 Each generation of
21This discussion is based on Steven C. Wheelwright and Kim B. Clark, “Creating Product Plans to Focus Product Develop-
ment,” Harvard Business Review 70 (March–April 1992): pp. 70–82.
22Ibid., p. 74.
23T. Michael Nevens, Gregory L. Summe, and Bro Uttal, “Commercializing Technology: What the Best Companies Do,”
Harvard Business Review 60 (May–June 1990): pp. 154–163; see also C. K. Prahalad, “Weak Signals versus Strong Paradigms,”
Journal of Marketing Research 32 (August 1995): pp. iii–vi.
24Marc H. Meyer and James M. Utterback, “The Product Family and the Dynamics of Core Capability,” Sloan Management
Review 34 (Spring 1993): pp. 29–47; see also Dwight L. Gertz and João P. A. Baptista, Grow to Be Great: Breaking the Downsizing Cycle (New York: The Free Press, 1995), pp. 92–103.
240 Part IV
Formulating Business Marketing Strategy
a product family has a platform that provides the foundation for specific products
targeted to different or complementary markets. By expanding on technical skills,
market knowledge, and manufacturing competencies, entirely new product families
may be formed, thereby creating new business opportunities.
Strategists argue that a firm should move away from planning that centers on single products and focus instead on families of products that can grow from a common
platform. Consider the Sony Walkman—one of the most successful products of all
time. Based on how different customer segments used the product, Sony developed
four basic platforms for the Walkman: playback only, playback and record, playback
and tuner, and sports. Then, by applying standard design elements such as color and
styling, Sony added an assortment of features and distinctive technical attributes to
the basic platforms with relative ease.25
The move toward a product-family perspective requires close interfunctional
working relationships, a long-term view of technology strategy, and a multipleyear commitment of resources. Although this approach offers significant competitive leverage, Steven Wheelwright and Kim Clark note that companies often fail
to invest adequately in platforms: “The reasons vary, but the most common is that
management lacks an awareness of the strategic value of platforms and fails to create
well-thought-out platform projects.”26
The Disruptive Innovation Model27
Special insights into innovation management come from examining the rate at which
products are improving and customers can use those improvements. For example,
when personal computers were first introduced in the early 1980s, typists often had
to pause for the Intel 286 chip to catch up. But today, only the most demanding customers can fully use the speed and performance of personal computers. For many
products, from Excel spreadsheets to application-enriched handsets and information
appliances, few customers absorb the performance features that innovating companies
include as they introduce new and improved products.
Overshooting Figure 9.2 shows, first, a rate of improvement in a given product or
technology that customers can use, represented by the dotted line, sloping slightly
upward across the chart. Second, for a given product, innovating firms offer a trajectory of improvement as they develop new and improved versions over time. The pace
of technological progress usually outstrips the ability of many, if not most, customers to keep up with it (see the steeply sloping solid lines in Figure 9.2). Therefore,
as companies strive to make better products they can sell at higher profit margins to
the most demanding customers, they overshoot and provide much more performance
than mainstream customers are able to use.
Sustaining versus Disruptive Innovation Third, from Figure 9.2, a distinction
is made between a sustaining innovation and a disruptive innovation. According to
Clayton M. Christensen and Michael E. Raynor, “A sustaining innovation targets
25Kathleen M. Eisenhardt and Shona L. Brown, “Time Pacing: Competing in Markets That Won’t Stand Still,” Harvard
Business Review, 76 (March–April 1998): p. 67.
26Wheelwright and Clark, “Creating Project Plans,” p. 74.
27This section is based on Christensen and Raynor, The Innovator’s Solution, pp. 31–65. See also, Ashish Sood and
Gerard J. Tellis, “Technological Evolution and Radical Innovation,” Journal of Marketing 69 (July 2005): pp. 152–168.
Chapter 9
FIGURE 9.2
Managing Innovation and New Industrial Product Development
241
THE DISRUPTIVE INNOVATION MODEL
gress
al Pro
logic
echno
T
f
o
e
Performance
Pac
ining
Susta
ations
Innov
Performance That Customers
Can Utilize or Absorb
Range of
Performance
That Customers
Can Utilize
Disruptive
Innovations
Time
SOURCE: Reprinted by permission of Harvard Business Review. From “Descriptive Innovation Model” in The Innovator’s
Solution by Clayton Christensen. p. 30. Copyright © 2003 by the Harvard Business School Publishing Corporation; all
rights reserved.
demanding, high-end customers with better performance than what was previously
available (for example, incremental product improvements or breakthrough products).”28 A disruptive innovation represents a product or service that is not as good
as currently available alternatives. “But disruptive technologies offer other benefits—
typically, they are simpler, more convenient, and less expensive products that appeal
to new or less-demanding customers.”29
Disruptive Strategy Examples Once a disruptive product or service gains a foothold, the improvement cycle begins and eventually it intersects with the needs of
more demanding customers. For example, Xerox held a commanding position in
the high-speed photocopier business until Canon’s simple tabletop copier disrupted
that strategy in the early 1980s. Likewise, Southwest Airlines disrupted established
airlines; Amazon.com disrupted traditional bookstores; Staples disrupted small
stationery stores and distributors of office supplies; and Google disrupted directories
of all sorts, including Yellow Pages.
Types of Disruptive Strategies Disruptive strategies can take two forms: lowend disruptions and new-market disruptions. Table 9.2 describes the characteristics
of these strategies and contrasts them with a strategy geared to sustaining innovations. Note, for example, the targeted customers for low-end disruption are overserved
customers, whereas new-market disruptions target nonconsumption—customers who
historically lacked the resources to buy and use the product.
28Christensen and Raynor, The Innovator’s Solution, p. 34.
29 Ibid., p. 34.
242 Part IV
Formulating Business Marketing Strategy
TABLE 9.2
THREE APPROACHES TO CREATING NEW-GROWTH BUSINESSES
Dimensions
Targeted performance of
the product or service
Targeted customers or
market application
Effect on the required
business model (processes
and cost structure)
Sustaining
Innovations
Low-End
Disruptions
New-Market
Disruptions
Performance
improvement in attributes
most valued by the
industry’s most demanding
customers.
These improvements
may be incremental or
breakthrough in character.
The most attractive (i.e.,
profitable) customers in
the mainstream markets
who are willing to pay for
improved performance.
Improves or maintains
profit margins by
exploiting the existing
processes and cost structure
and making better use
of current competitive
advantages.
Performance that is
good enough along the
traditional metrics of
performance at the low
end of the mainstream
market.
Lower performance in
“traditional” attributes,
but improved performance
in new attributes—typically
simplicity and convenience.
Overserved customers
in the low end of the
mainstream market.
Targets nonconsumption:
customers who historically
lacked the money or
skill to buy and use the
product.
Business model must
make money at lower
price per unit sold and at
unit production volumes
that initially will be small.
Gross margin dollars
per unit sold will be
significantly lower.
Uses a new operating or
financial approach or both—
a different combination
of lower gross profit
margins and higher asset
utilization that can earn
attractive returns at the
discount prices required
to win business at the low
end of the market.
SOURCE: Reprinted by permission of the Harvard Business Review. From “Three Approaches to Creating New Growth Business” in The Innovator’s
Solution by Clayton Christensen, p. 51. Copyright © 2003 by the Harvard Business School Publishing Corporation; all rights reserved.
Low-End Strategy Tests For a low-end disruptive strategy to succeed, two requirements must be met:
1. There should be customers at the low end of the market who are eager to
purchase a “good-enough” product if they could acquire it at a lower price.
2. The company must be able to create a business model that can yield attractive
profits at the discount prices that are needed to attract customers at the low
end of the market.
Example: Southwest Airlines drew customers away from the major carriers.
New-Market Strategy Tests For new market disruptions, at least one and
generally both of these requirements must be met:
1. A large population can be defined who have historically lacked the money,
equipment, or skill to acquire this product or service for themselves.
2. Present customers need to go to an inconvenient location to use the product or
service.
Examples: Canon desktop photocopiers were a new-market disruption in the
1980s because they enabled employees to make their own copies rather than
Chapter 9
Managing Innovation and New Industrial Product Development
243
taking their originals to the corporate high-speed copying center to get help
from technical specialists. Also, Research in Motion Limited’s BlackBerry is
a new-market disruption relative to notebook computers.
A Final Litmus Test Once an innovation passes the tests that apply to low-end
or new-market disruptions, a final critical test remains: The innovation must be
disruptive to all the significant competitive firms in the industry. If one or more of the
significant industry players is pursuing the strategy, the odds will be stacked against
the new entrant.
Illustration: A New-Market Disruption30
One principle for developing disruptive ideas is to “do what competitors want.”
For instance, Salesforce.com has pursued a strategy that leaders in the customer
relationship (CRM) software market—namely SAP and Oracle—found unappealing. Before Salesforce.com entered the market, both of these formidable rivals sold
relatively expensive solutions that required customization and installation to ensure
proper integration with the customer’s other software packages. Customers also were
charged an ongoing fee for maintenance of the installed software.
Adopting a Different Approach Salesforce.com provides customers with access
to programs that reside on centralized host computers. Users access these databases
through the Web for a modest monthly fee. While customers often find these hosted
solutions to be occasionally slower and somewhat more difficult to readily integrate
with other applications, they are flexible, easy to use, and quite economical—all defining characteristics of a disruptive innovation.
Scott D. Anthony and his colleagues observe that “Salesforce.com used several tactics that made its competitors unwilling or uninterested in immediately responding:
• It started with nonconsumption (that is, selling to small customers purchasing
their first CRM software).
• It targeted a customer its competitors considered undesirable (that is, small and
medium-sized businesses that were the least profitable for rivals).
• It used a different distribution channel (that is, on the Web).
• It created a business model that did not depend on a revenue stream of vital importance to incumbents.”31 (By centering on installation and customization fees,
SAP and Oracle did not find the fees related to a hosted model to be appealing.)
Innovation Winners in High-Technology Markets
In rapidly changing industries with short product life cycles and quickly shifting competitive landscapes, a firm must continually innovate to keep its offerings aligned with
the market. A firm’s ability to cope with change in a high-velocity industry is a key
30Scott D. Anthony, Mark W. Johnson, Joseph V. Sinfield, and Elizabeth J. Altman, The Innovator’s Guide to Growth: Putting
Disruptive Innovation to Work (Boston: Harvard Business Press, 2008), pp. 125–126.
31Ibid., p. 126.
244 Part IV
Formulating Business Marketing Strategy
to competitive success. Shona Brown and Kathleen Eisenhardt provide an intriguing comparison of successful versus less successful product innovation in the computer industry.32 Successful innovators were firms that were on schedule, on time to
the market, and on target in addressing customer needs. The study found that firms
with a successful record of product innovation use different organizational structures
and processes than their competitors. In particular, four distinguishing characteristics
marked the innovation approach of successful firms.
1. Limited Structure Creating successful products to meet changing customer
needs requires flexibility, but successful product innovators combine this flexibility
with a few rules that are never broken. First, strict priorities for new products are
established and tied directly to resource allocation. This allows managers to direct
attention to the most promising opportunities, avoiding the temptation to pursue too
many attractive opportunities. Second, managers set deadlines for a few key milestones and always meet them. Third, responsibility for a limited number of major
outcomes is set. For example, at one firm, engineering managers were responsible
for product schedules while marketing managers were responsible for market definition and product profitability. Although successful firms emphasized structure
for a few areas (for example, priorities or deadlines), less successful innovators imposed more control—lockstep, checkpoint procedures for every facet of new product
development—or virtually no structure at all. Successful firms strike a balance by using a structure that is neither so rigid as to stiffly control the process nor so chaotic
that the process falls apart.
2. Real-Time Communication and Improvisation Successful product innovators
in the computer industry emphasize real-time communication within new-productdevelopment teams and across product teams. Much of the communication occurs in
formal meetings, but there is also extensive informal communication throughout the
organization. Clear priorities and responsibilities, coupled with extensive communications, allow product developers to improvise. “In the context of jazz improvisation,
this means creating music while adjusting to the changing musical interpretations of
others. In the context of product innovation, it means creating a product while simultaneously adapting to changing markets and technologies.”33
More formally, then, improvisation involves the design and execution of actions
that approach convergence with each other in time.34 The shorter the elapsed time
between the design and implementation of an activity, the more that activity is improvisational. Successful firms expect constant change, and new product teams have
the freedom to act. One manager noted: “We fiddle right up to the end” of the newproduct-development process. Real-time communications among members of the
product development team, coupled with limited structure, provide the foundation
for such improvisation.
32This section is based on Shona L. Brown and Kathleen M. Eisenhardt, “The Art of Continuous Change: Linking
Complexity Theory and Time-Paced Evolution in Relentlessly Shifting Organizations,” Administrative Science Quarterly
42 (March 1997): pp. 1–34.
33Ibid., p. 15.
34Christine Moorman and Anne S. Miner, “The Convergence of Planning and Execution: Improvisation in New Product
Development,” Journal of Marketing 62 (July 1998): p. 3.
Chapter 9
Managing Innovation and New Industrial Product Development
245
INSIDE BUSINESS MARKETING
Patching: The New Corporate Strategy in Dynamic Markets
Kathleen M. Eisenhardt and Shona L. Brown
contend that traditional corporate planning and
resource allocation approaches are not effective
in volatile markets. As new technologies, novel
products and services, and emerging markets create
tempting opportunities, “the clear-cut partitioning
of businesses into neat, equidistant rectangles on an
organizational chart becomes out of date.”
The new corporate-level strategic processes
center on managing change and continually
realigning the organization to capture market
opportunities faster than the competition. Central
to this newly defined approach is patching—the
strategic process corporate executives use routinely
to realign or remap businesses to changing market
opportunities. Patching can take the form of adding,
dividing, transferring, exiting, or combining pieces
of businesses. Hewlett-Packard used patching
to launch the printer business, create businesses
in related products like scanners and faxes, and
develop a second printer business built around inkjet
technology. Patching is less critical in stable markets
but a crucial skill when markets are turbulent. Here a
small, agile unit of the firm can be mobilized quickly
to capture fresh market opportunities.
SOURCES: Kathleen M. Eisenhardt and Shona L. Brown,
“Patching: Restitching Business Portfolios in Dynamic Markets,”
Harvard Business Review 77 (May–June 1999): pp. 72–82; see also,
Mark B. Houston, Beth A. Walker, Michael D. Hutt, and Peter
H. Reingen, “Cross-Unit Competition for a Market Charter:
The Enduring Influence of Structure,” Journal of Marketing 65
(April 2001): pp. 19–34.
3. Experimentation: Probing into the Future Some firms make a large bet on
one version of the future, whereas others fail to update future plans in light of changing competition. Creators of successful product portfolios did not invest in any one
version of the future but, instead, used a variety of low-cost probes to create options.
Examples of low-cost probes include developing experimental products for new markets, entering into a strategic alliance with leading-edge customers to better understand future needs, or conducting regular planning sessions dedicated to the future.
In turbulent industries, strategists cannot accurately predict which of many possible
versions of the future will arrive. Probes create more possible responses for managers when the future does arrive while lowering the probability of being surprised by
unanticipated futures.
4. Time Pacing Successful product innovators carefully managed the transition between current and future projects, whereas less successful innovators let each project
unfold according to its own schedule. Successful innovators, like Intel, practice time
pacing—a strategy for competing in fast-changing markets by creating new products
at predictable time intervals.35 Organization members carefully choreograph and understand transition processes. For example, marketing managers might begin work
on the definition of the next product while engineering is completing work on the
current product and moving it to manufacturing. Time pacing motivates managers
to anticipate change and can have a strong psychological impact across the organization. “Time pacing creates a relentless sense of urgency around meeting deadlines
and concentrates individual and team energy around common goals.”36
35Eisenhardt and Brown, “Time Pacing,” pp. 59–69.
36 Ibid., p. 60.
246 Part IV
Formulating Business Marketing Strategy
The New-Product-Development Process
To sustain their competitive advantage, leading-edge firms such as Canon, Microsoft, and Hewlett-Packard make new product development a top management priority. They directly involve managers and employees from across the organization
to speed actions and decisions. Because new product ventures can represent a significant risk as well as an important opportunity, new product development requires
systematic thought. The high expectations for new products are often not fulfilled.
Worse, many new industrial products fail. Although the definitions of failure are
somewhat elusive, research suggests that 40 percent of industrial products fail to
meet objectives.37 Although there may be some debate over the number of failures,
there is no debate that a new product rejected by the market constitutes a substantial waste to the firm and to society.
This section explores (1) the forces that drive a firm’s new product performance, (2) the sources of new product ideas, (3) cross-functional barriers to successful
innovation, and (4) team-based processes used in new product development. A promising method for bringing the “voice of the consumer” directly into the development
process is also explored.
What Drives a Firm’s New Product Performance?
A benchmarking study sought to uncover the critical success factors that drive a firm’s
new product performance.38 It identified three factors (Figure 9.3): (1) the quality of a
firm’s new-product-development process, (2) the resource commitments made to new
product development, and (3) the new product strategy.
Process Successful companies use a high-quality new-product-development
process—they give careful attention to executing the activities and decision points
that new products follow from the idea stage to launch and beyond. The benchmarking study identifi ed the following characteristics among high-performing
firms:
• The firms emphasized upfront market and technical assessments before projects
moved into the development phase.
• The process featured complete descriptions of the product concept, product benefits, positioning, and target markets before development work was
initiated.
• Tough project go/kill decision points were included in the process, and the kill
option was actually used.
• The new product process was flexible—certain stages could be skipped in line
with the nature and risk of a particular project.
37Robert G. Cooper, Scott J. Edgett, and Elko J. Kleinschmidt, “Benchmarking Best NPD Practices–I,” Research Technology
Management 47 (January–February 2004): pp. 31–43; see also Robert G. Cooper and Scott J. Edgett, “Maximizing Productivity in Product Innovation,” Research Technology Management 51 (March–April 2008): pp. 47–58.
38Robert G. Cooper and Elko J. Kleinschmidt, “Benchmarking Firms’ New Product Performance and Practices,” Engineering Management Review 23 (Fall 1995): pp. 112–120; see also Robert G. Cooper, Scott J. Edgett, and Elko J. Kleinschmidt,
“Benchmarking Best NPD Practices–II,” Research Technology Management 47 (May–June 2004): pp. 50–59.
Chapter 9
FIGURE 9.3
Managing Innovation and New Industrial Product Development
247
THE MAJOR DRIVERS OF A FIRM’S NEW PRODUCT PERFORMANCE
DRIVERS
ILLUSTRATIVE PERFORMANCE
OUTCOMES
New Product
Development Process
Success Rate
of New Products
New Product
Strategy
Resource
Commitment
A Firm's New
Product Performance
Profit Impact of New
Products on Company
Profitability Relative
to Competition
SOURCE: Adapted from Robert G. Cooper and Elko J. Kleinschmidt, “Benchmarking Firms’ New Product Performance and Practices,”
Engineering Management Review 23 (Fall 1995): pp. 112–120.
Detailed upfront homework on the product concept, the likely market response, and
the product’s technical feasibility, along with a thorough business and financial assessment, are important dimensions of the process successful product creators follow.
Resource Commitments Adequate resources were invested in new product development in top-performing firms. Three ingredients were important here:
1. Top management committed the resources necessary to meet the firm’s
objectives for the total product effort.
2. R&D budgets were adequate and aligned with the stated new product objectives.
3. The necessary personnel were assigned and were relieved from other duties so
that they could give full attention to new product development.
Research suggests that rather than being imposed by top management, the creative
potential of new-product-development teams “is likely to be more fully realized
when they are given the flexibility—within a broad strategic directive—to determine their own project controls and especially to pursue their own processes and
procedures.”39
39Joseph M. Bonner, Robert W. Ruekert, and Orville C. Walker Jr., “Upper Management Control of New Product
Development Projects and Project Performance,” Journal of Product Innovation Management 19 (May 2002): p. 243.
248 Part IV
Formulating Business Marketing Strategy
New Product Strategy A clear and visible new product strategy was another
driver of a firm’s new product performance (see Figure 9.3). Successful firms like 3M
set aggressive new product performance goals (for example, x percent of company
sales and profit from new products) as a basic corporate goal and communicate it to
all employees. In turn, Robert Cooper and Elko Kleinschmidt report that successful firms centered development efforts on clearly defined arenas—particular product,
market, and technology domains—to direct the new product program:
The new product strategy specifies “the arenas where we’ll play the game,”
or perhaps more important, where we won’t play . . . what’s in bounds and
out of bounds. Without arenas defined, the search for new product ideas or
opportunities is unfocused. . . .40
Anticipating Competitive Reactions41
Two-thirds of new product introductions trigger reactions by competitors. Consequently, business marketers can improve the odds of new-product-launch success by
implementing a strong competitor orientation before and during the launch. Here
the new product strategist develops detailed scenarios that provide a guide for countering different competitive responses. Competitors are strongly motivated to react
when (1) the new product represents a major threat to their market and (2) the market is experiencing a high rate of growth. Competitors are also more inclined to react when extensive marketing communications by the innovating firm enhance the
visibility of the new product introduction.
Alternatively, if the new product introduction does not pose a direct challenge to
the competitor’s market, a reaction is less likely. Recent research suggests that radically new products or products that target niche markets are less likely to spawn competitive responses.
Sources of New Product Ideas
The business marketer should be alert to new product ideas and their sources, both
inside and outside the company. Internally, new product ideas may flow from salespersons who are close to customer needs, from R&D specialists who are close to new
technological developments, and from top management who know the company’s
strengths and weaknesses. Externally, ideas may come from channel members, such as
distributors or customers, or from an assessment of competitive moves.
Eric von Hippel challenges the traditional view that marketers typically introduce
new products to a passive market.42 His research suggests that the customers in the
40Cooper and Kleinschmidt, “Benchmarking,” p. 117; see also Jean-Marie Choffray and Gary L. Lilien, “Assessing Response
to Industrial Marketing Strategy,” Journal of Marketing 42 (April 1978): pp. 20–31; and Eunsang Yoon and Gary L. Lilien,
“New Industrial Product Performance: The Effects of Market Characteristics and Strategy,” Journal of Product Innovation
Management 3 (September 1985): pp. 134–144.
41Marion Debruyne, Rudy Moenart, Abbie Griffin, Susan Hart, Erik Jan Hultink, and Henry Robben, “The Impact of New
Product Launch Strategies on Competitive Reaction in Industrial Markets,” Journal of Product Innovation Management 19
(March 2002): pp. 159–170; see also Beth A. Walker, Dimitri Kapelianis, and Michael D. Hutt, “Competitive Cognition,”
MIT Sloan Management Review 46 (Summer 2005): pp. 10–12.
42Eric von Hippel, “Get New Products from Customers,” Harvard Business Review 60 (March–April 1982): pp. 117–122; see
also Eric von Hippel, The Sources of Innovation (New York: Oxford University Press, 1988); Gerard A. Athaide and Rodney L.
Stump, “A Taxonomy of Relationship Approaches during Technology Development in Technology-Based, Industrial
Markets,” Journal of Product Innovation Management 16 (September 1999): pp. 469–482.
Chapter 9
Managing Innovation and New Industrial Product Development
249
B2B TOP PERFORMERS
IDEO: The Hits Just Keep on Coming!
IDEO helps organizations innovate through
design. Leading firms like Apple, Research In
Motion, Sony, 3M, and others have used product
design to define their brands, creating meaningful
points of difference over competitors.
Among their greatest hits, IDEO is responsible
for designing
• the Microsoft mouse;
• the coasting bicycle design strategy for Shimano;
• improved patient-provider services for Mayo
Clinic;
• “Keep the Change” account service for Bank of
America.
FastCompany.com identifies IDEO as one of the
world’s most innovative companies.
• the Swiffer Sweeper for Procter & Gamble;
• mobile sound components for Altec Lansing;
SOURCE: http://www.ideo.com/portfolio/list.asp?p=0&c=&
k=40&s=&so=4
business market often develop the idea for a new product and even select the supplier
to make that product. The customer is responding to the perceived capability of the
business marketer rather than to a specific physical product. This points up the need
for involving customers in new product development and promoting corporate capability to consumers (idea generators).
Lead Users Because many industrial product markets for high-technology and, in
particular, capital equipment consist of a small number of high-volume buying firms,
special attention must be given to the needs of lead users. These include a small
number of highly influential buying organizations that are consistent early adopters
of new technologies.43 Lead users face needs that are general in the marketplace, but
they confront these needs months or years before most of that marketplace encounters them. In addition, they are positioned to benefit significantly by obtaining a solution that satisfies those needs. For example, if an automobile manufacturer wanted to
design an innovative braking system, marketing managers might secure insights from
auto racing teams, who have a strong need for better brakes. In turn, they might look
to a related field like aerospace, where antilock braking systems were first developed
so that military aircraft could land on short runways.44
The Lead User Method Lead user projects are conducted by a cross-functional
team that includes four to six managers from marketing and technical departments;
one member serves as project leader. Team members typically spend 12 to 15 hours
per week on the projects, which are usually completed in four to six weeks. Lead user
projects proceed through five phases (Figure 9.4). 3M has now successfully used the
lead user method in eight different divisions, and support among project teams and
divisional managers is strong. For example, the Medical-Surgical Markets Group at
43von Hippel, “Get New Products,” pp. 120–121.
44Eric von Hippel, Stefan Thomke, and Mary Sonnack, “Creating Breakthroughs at 3M,” Harvard Business Review 77
(September–October 1999): pp. 47–57.
250 Part IV
Formulating Business Marketing Strategy
FIGURE 9.4
Phase
THE LEAD USER METHOD
Central Focus
Description
Phase 1
Laying the Foundation
The team identifies target markets and secures
support from internal stakeholders for the type
and level of innovations desired.
Phase 2
Determining the Trends
The team talks to experts in the field who have
a broad view of emerging technologies and pioneering applications in the particular area.
Phase 3
Identifying Lead Users
The team begins a networking process to identify lead users at the leading edge of the target
market and to gather information that might
contribute to breakthrough products.
Phase 4
Developing & Assessing
Preliminary Product Ideas
The team begins to shape product ideas and to
assess market potential and fit with company
interests.
Phase 5
Developing the Breakthroughs
To design final concepts, the team hosts a
workshop bringing together lead users with
other in-house managers. After further refinement, the team presents its recommendations
to senior management.
SOURCE: Adapted with modifications from Eric von Hippel, Stefan Thomke, and Mary Sonnack, “Creating Breakthroughs
at 3M,” Harvard Business Review 77 (September–October 1999), p. 52.
3M used the lead user method to unearth new product ideas and to identify a revolutionary approach to infection control.45 3M reports that sales in year 5 for funded lead
user project ideas were more than eight times greater than those generated by traditional approaches to idea generation.46 Other firms adopting a lead user focus include
Nortel Networks, Verizon, Nestle, Pitney Bowes, and Philips.
Customer Visits A popular approach among business marketers for gaining new
product insights is customer visits.47 Here a cross-functional team visits a customer organization to secure a first-hand account of customer needs. Based on a carefully crafted
interview guide, in-depth interviews are conducted with key buying influentials to uncover user problems, needs, and desires. For instance, company representatives at Intuit
visit customers where they live and work to observe how they use its products such as
QuickBooks. After watching many small-business customers struggle with QuickBooks
Pro, the firm saw a need and created the solution: QuickBooks Simple Start.48
Web-Based Methods for Improving Customer Inputs to Design Recognizing
the ability of customers to innovate, many firms have developed tools that invite
45Ibid., p. 56.
46“User Innovation: Changing Innovation Focus,” Strategic Direction 23 (8, 2007): pp. 35–36.
47Robert Cooper and Scott Edgett, “Ideation for Product Innovation: What Are the Best Methods?” Product Development
Institute, Inc., 2008, accessed at http://www.stage-gate.com on July 10, 2008.
48Christopher Meyer and Andre Schwager, “Understanding Customer Experience,” Harvard Business Review 85 (February
2007): p. 8.
Chapter 9
Managing Innovation and New Industrial Product Development
251
customers to design their own products. With these innovative toolkits, customers
are given an array of features that can be configured, as desired, to create their own
customized products. These toolkits often incorporate engineering and cost modules.
To illustrate, if a customer wishes to change the length of a truck bed, the design
tool automatically computes the additional cost and the associated changes that will
be required in both the transmission and the engine. For aesthetic compatibility, the
design tool might even modify the shape of the cab. Other examples: In its materials
business, General Electric provides Web-based tools that customers use for designing better plastics products. Likewise, many software companies encourage users to
add custom-designed modules to their standard products and then commercializes
the best of those components.49
Determinants of New Product
Performance and Timeliness
What factors are most important in determining the success or failure of the new
product? Why are some firms faster than others in moving projects through the
development process? Let’s review the available evidence.
The Determinants of Success
Both strategic factors and a firm’s proficiency in carrying out the new-productdevelopment process determine new product success.50
Strategic Factors Research suggests that four strategic factors appear to be crucial
to new product success. The level of product advantage is the most important. Product advantage refers to customer perceptions of product superiority with respect to
quality, cost–performance ratio, or function relative to competitors. Successful products offer clear benefits, such as reduced customer costs, and are of higher quality (for
example, more durable) than competitors’ products. A study of more than 100 new
product projects in the chemical industry illustrates the point. Here, Robert Cooper
and Elko Kleinschmidt assert, “The winners are new products that offer high relative product quality, have superior price/performance characteristics, provide good
value for the money to the customer, are superior to competing products in meeting
customer needs, [and] have unique attributes and highly visible benefits that are easily
seen by the customer.”51
Marketing synergy and technical synergy are also pivotal in new product outcomes. Marketing synergy is the fit between the needs of the project and the firm’s
49Stephen Thomke and Eric von Hippel, “Customers as Innovators: A New Way to Create Value,” Harvard Business Review
80 (April 2002): pp. 74–81.
50Mitzi M. Montoya-Weiss and Roger Calantone, “Determinants of New Product Performance: A Review and Meta-
Analysis,” Journal of Product Innovation Management 11 (November 1994): pp. 397–417; see also Robert G. Cooper,
Scott J. Edgett, and Elko J. Kleinschmidt, “Benchmarking Best NPD Practices–III,” Research Technology Management 47
(November–December 2004): pp. 43–55.
51Robert G. Cooper and Elko J. Kleinschmidt, “Major New Products: What Distinguishes the Winners in the Chemical
Industry?” Journal of Product Innovation Management 10 (March 1993): p. 108; see also Tiger Li and Roger J. Calantone,
“The Impact of Market Knowledge Competence on New Product Advantage: Conceptualization and Empirical
Examination,” Journal of Marketing 62 (October 1998): pp. 13–29.
252 Part IV
Formulating Business Marketing Strategy
resources and skills in marketing (for example, personal selling or market research).
By contrast, technical synergy concerns the fit between the needs of the project and
the firm’s R&D resources and competencies. New products that match the skills of
the firm are likely to succeed.
In addition to the preceding three factors, an international orientation also
contributes to the success of product innovation.52 New products designed and developed to meet foreign requirements and targeted at world or nearest-neighbor export
markets outperform domestic products on almost every measure, including success
rate, profitability, and domestic and foreign market shares. Underlying this success is
a strong international focus in market research, product testing with customers, trial
selling, and launch efforts.
Development Process Factors New product success is also associated with particular characteristics of the development process. Predevelopment proficiency provides
the foundation for a successful product. Predevelopment involves several important
tasks such as initial screening, preliminary market and technical assessment, detailed
market research study, and preliminary business/financial analysis. Firms that are skilled
in completing these upfront tasks are likely to experience new product success.
Market knowledge and marketing proficiency are also pivotal in new product
outcomes. As might be expected, business marketers with a solid understanding of
market needs are likely to succeed. Robert Cooper describes the market planning for
a successful product he examined: “Market information was very complete: there was
a solid understanding of the customer’s needs, wants, and preferences; of the customer’s
buying behavior and price sensitivity; of the size and trends of the market; and of
the competitive situation. Finally, the market launch was well planned, well targeted,
proficiently executed, and backed by appropriate resources.”53
Technical knowledge and technical proficiency are other important dimensions of the new-product-development process. When technical developers have a
strong base of knowledge about the technical aspects of a potential new product, and
when they can proficiently pass through the stages of the new-product-development
process (for example, product development, prototype testing, pilot production, and
production start-up), these products succeed.
Fast-Paced Product Development
Rapid product development offers a number of competitive advantages. To illustrate, speed enables a firm to respond to rapidly changing markets and technologies.
Moreover, fast product development is usually more efficient because lengthy development processes tend to waste resources on peripheral activities and changes.54 Of
course, although an overemphasis on speed may create other pitfalls, it is becoming an
important strategic weapon, particularly in high-technology markets.
52Elko J. Kleinschmidt and Robert G. Cooper, “The Performance Impact of an International Orientation on Product
Innovation,” European Journal of Marketing 22 (9, 1988): pp. 56–71.
53Robert G. Cooper, Winning at New Products: Accelerating the Process from Idea to Launch (Reading, Mass: Addison-Wesley,
1993), p. 27; see also Robert G. Cooper, “Perspective: The Stage-Gate® Idea to Launch Process—Update, What’s New,
and NextGen Systems,” Journal of Product Innovation Management 25 (May 2008): pp. 213–232.
54See, for example, Robert G. Cooper and Elko J. Kleinschmidt, “Determinants of Timeliness in Product Development,”
Journal of Product Innovation Management 11 (November 1994): pp. 381–417.
Chapter 9
Managing Innovation and New Industrial Product Development
253
Matching the Process to the Development Task How can a firm accelerate
product development? A major study of the global computer industry provides some
important benchmarks.55 Researchers examined 72 product development projects of
leading U.S., European, and Asian computer firms. The findings suggest that multiple approaches are used to increase speed in product development. Speed comes from
properly matching the approach to the product development task at hand.
Compressed Strategy for Predictable Projects For well-known markets and
technologies, a compression strategy speeds development. This strategy views product development as a predictable series of steps that can be compressed. Speed comes
from carefully planning these steps and shortening the time it takes to complete each
one. This research indicates that the compressed strategy increased the speed of product development for products that had predictable designs and that were targeted for
stable and mature markets. Mainframe computers fit into this category—they rely
on proprietary hardware, have more predictable designs from project to project, and
compete in a mature market.
Experiential Strategy for Unpredictable Projects For uncertain markets and technologies, an experiential strategy accelerates product development. The underlying
assumption of this strategy, explain Kathleen Eisenhardt and Behnam Tabrizi, is that
“product development is a highly uncertain path through foggy and shifting markets and
technologies. The key to fast product development is, then, rapidly building intuition and
flexible options in order to learn quickly about and shift with uncertain environments.”56
Under these conditions, speed comes from multiple design iterations, extensive
testing, frequent milestones, and a powerful leader who can keep the product team focused. Here real-time interactions, experimentation, and flexibility are essential. The
research found that the experiential strategy increased the speed of product development for unpredictable projects such as personal computers—a market characterized
by rapidly evolving technology and unpredictable patterns of competition.
Summary
Product innovation is a high-risk and potentially rewarding process. Sustained growth
depends on innovative products that respond to existing or emerging consumer needs.
Effective managers of innovation channel and control its main directions but have
learned to stay flexible and expect surprises. Within the firm, marketing managers
pursue strategic activity that falls into two broad categories: induced and autonomous
strategic behavior.
New-product-development efforts for existing businesses or market-development
projects for the firm’s present products are the outgrowth of induced strategic initiatives. In contrast, autonomous strategic efforts take shape outside the firm’s current
concept of strategy, depart from the current course, and center on new categories of
business opportunity; middle managers initiate the project, champion its development, and, if successful, see the project integrated into the firm’s concept of strategy.
55Kathleen M. Eisenhardt and Behnam N. Tabrizi, “Accelerating Adaptive Processes: Product Innovation in the Global
Computer Industry,” Administrative Science Quarterly 40 (March 1995): pp. 84–110.
56Ibid., p. 91.
254 Part IV
Formulating Business Marketing Strategy
Corporate entrepreneurs thrive in a culture where senior managers promote and
reward innovative behavior, encourage risk-taking, and provide the administrative
mechanisms to screen, develop, and implement new product ideas.
The long-run competitive position of most business marketing firms depends on
their ability to manage and increase their technological base. Core competencies provide the basis for products and product families. Each generation of a product family
has a platform that serves as the foundation for specific products targeted at different or complementary market applications. Because companies keep working to make
better products, they can sell at higher profit margins to the most demanding customers, and they often overshoot the needs of mainstream customers. A sustaining innovation provides demanding high-end customers with improved performance, whereas
disruptive innovations target new or less-demanding customers with an easy-to-use,
less-expensive alternative that is “good enough.” Disruptive strategies take two forms:
low-end and new-market disruptions.
Firms that are successful innovators in turbulent markets combine limited structures (for example, priorities, deadlines) with extensive communication and the freedom to improvise on current projects. These successful product creators also explore
the future by experimenting with a variety of low-cost probes and build a relentless
sense of urgency in the organization by creating new products at predictable time
intervals (i.e., time pacing).
Effective new product development requires a thorough knowledge of customer
needs and a clear grasp of the technological possibilities. Lead user analysis and customer visits often uncover valuable new product opportunities. Top-performing firms
execute the new-product-development process proficiently, provide adequate resources
to support new product objectives, and develop clear new product strategy. Both
strategic factors and the firm’s proficiency in executing the new-product-development
process are critical to the success of industrial products. Fast-paced product development can provide an important source of competitive advantage. Speed comes from
adapting the process to the new-product-development task at hand.
Discussion Questions
1. Research by James Quinn suggests that few major innovations result
from highly structured planning systems. What does this imply for the
business marketer?
2. Compare and contrast induced and autonomous strategic behavior.
Describe the role of the product champion in the new-productdevelopment process.
3. The breakthrough products for many companies did not emerge
from the formal new-product-development process. Instead, they
were championed by a few resourceful employees. What steps can
organizations take to motivate and support corporate entrepreneurship?
4. Compare and contrast a low-end versus a new-market disruptive
strategy.
5. In many markets, a new entrant might consider a strategy that provides
potential customers with a product or technology that is “good enough”
Chapter 9
Managing Innovation and New Industrial Product Development
255
rather than “superior” to existing options. Describe the key tests that
a disruptive strategy must pass in order to stack the odds for success in
its favor.
6. In fast-changing high-tech industries, some firms have a better record in
developing new products than others. Describe the critical factors that
drive the new product performance of firms.
7. Rather than planning for and investing in just one version of the future,
some firms use low-cost probes to experiment with many possible
futures. Evaluate the wisdom of this approach.
8. Describe how Marriott might employ lead user analysis to better align
its properties and services with the needs of the executive traveler.
9. New industrial products that succeed provide clear-cut advantages to
customers. Define product advantage and provide an example of a recent
new product introduction that fits this definition.
10. Evaluate this statement: “To increase the speed of the new-productdevelopment process, a firm might follow one strategy for unpredictable
projects and an entirely different one for more predictable ones.”
Internet Exercise
1. Years ago, Corning sold dishes and glassware in the consumer market.
Today, the firm might be characterized as a high-tech material science
company that competes successfully in an array of business markets. Go
to http://www.corning.com and identify its major product lines.
256 Part IV
Formulating Business Marketing Strategy
CASE
Steelcase Inc. Extends Reach to Growing
Health-Care Market
Steelcase, a leading office furniture manufacturer, launched a new health-care-focused
subsidiary called Nurture. James P. Hackett, president and CEO of Steelcase, had assigned a team to study the health care market, and here is what they concluded:
We should move into the health-care market by launching a new health care
brand. It would expand our current effort “on carpet”—work areas in hospitals that are like the office spaces (nurses’ stations, for instance)—but we
would also expand “off carpet”—to entirely different areas of the hospital (patients’ rooms, examining rooms, café lounges). . . . The brand would draw on
technology and products we already had, as well as new products we would
manufacture and new customizing services we would provide.57
The team got the go-ahead from senior management to launch the new business unit
and the Nurture brand.
Given that the cost of hospital care is expected to exceed $1.2 trillion by 2016,
Steelcase executives saw the health-care market as a golden opportunity.58 They
were also encouraged to learn that the highest sales volume for the company’s Criterion chair—a classic desk seat with adjustable back tension, lumbar-curve support,
and wrist rests—was going to health-care customers—hospitals, clinics, and doctors’
offices.
John Carlson, vice president of product development and marketing at Nurture,
believes that the unit can enjoy a competitive advantage by offering cohesive suites
of examination tables, patient beds, nurses’ stations, and the like. However, there are
some formidable competitors that have deep knowledge of health-care customers, like
Hill-Rom, a unit of Hillenbrand Industries. A leading manufacturer of hospital beds,
Hill-Rom also offers a limited collection of furniture selections but has been squarely
centered on the health-care market for decades and has forged close and enduring
relationships with physicians, nurses, and administrators at health-care facilities, large
and small.
Discussion Question
1. To develop patient-friendly furnishings or suites of products that boost staff
productivity, describe specific steps that marketing strategists at Nurture might
take to learn more about the workings of a hospital environment and the needs
of different constituents—patients, visitors, nurses, and physicians.
57James P. Hackett, “Preparing for the Perfect Launch,” Harvard Business Review 85 (April 2007): p. 49.
58Reena Jana, “Steelcase’s Medical Breakthrough,” March 22, 2007, accessed at http://www.businessweek.com
on July 14,
2008.
256
CHAPTER
10
Managing Services for
Business Markets
The important and growing market for business services poses special challenges
and meaningful opportunities for the marketing manager. This chapter explores the
unique aspects of business services and the special role they play in the business market environment. After reading this chapter, you will understand:
1. the value of systematically monitoring the customer experience and the
central role that business services assume in customer solutions.
2. the roles that service quality, customer satisfaction, and loyalty assume
in service market success.
3. significant factors to consider in formulating a service marketing strategy.
4. the determinants of new service success and failure.
257
258 Part IV
Formulating Business Marketing Strategy
FedEx Corporation, the global package delivery service, mobilizes for trouble before
it occurs: Each night, five empty FedEx jets roam over the United States.1 Why? So
the firm can respond on a moment’s notice to unexpected events such as overbooking
of packages in Atlanta or an equipment failure in Denver. FedEx excels by making
promises to its customers and keeping them. The first major service organization to
win the Malcolm Baldrige National Quality Award, FedEx makes specific promises
about the timeliness and reliability of package delivery in its advertising and marketing communications. More importantly, FedEx aligns its personnel, facilities, information technology, and equipment to meet those promises. Says Scot Struminger,
vice president of information technology at FedEx, “We know that customer loyalty
comes from treating customers like you want to be treated.”2
As this example demonstrates, services play a critical role in the marketing
programs of many business-to-business firms, whether their primary focus is on a service
(FedEx) or whether services provide a promising new path for growth. Indeed, hightech brands, like IBM or Hewlett-Packard, are built on a promise of value to customers,
and service excellence is part of the value package customers demand. In fact, over half
of IBM’s massive revenue base now comes from services—not products. Clearly, many
product manufacturers are now using integrated product and service solutions as a core
marketing strategy for creating new growth opportunities; moreover, a vast array of
“pure service” firms exist to supply organizations with everything from office cleaning
to management consulting and just-in-time delivery to key customers.3
This chapter examines the nature of business services, the key buying behaviors associated with their purchase, the major strategic elements related to services
marketing, and the new-service-development process.
Understanding the Full
Customer Experience
The traditional product-centric mindset rests on the assumption that companies win
by creating superior products and continually enhancing the performance of existing products. But services are fundamental to the customer experience that every
business-to-business firm provides. Customer experience encompasses every dimension of a company’s offering—product and service features, advertising, ease of use,
reliability, the process of becoming a customer, or the way problems are resolved—
not to mention the ongoing sales relationship.4
The Customer Experience Life Cycle
Recent research highlights the importance of examining the customer’s experience. A survey of the customers of 362 firms by Bain & Company revealed that only
1David Leonhardt, “The FedEx Economy,” New York Times, October 8, 2005, p. B1.
2Don Peppers and Martha Rogers, Return on Customer: Creating Maximum Value from Your Scarcest Resource (New York:
Currency Doubleday, 2005), p. 144.
3Kristian Möller, Risto Rajala, and Mika Westerlund, “Service Innovation Myopia? A New Recipe for Client-Provider Value
Creation,” California Management Review 50 (Spring 2008): pp. 31–48.
4Christopher Meyer and Andre Schwager, “Understanding Customer Experiences,” Harvard Business Review 85 (February
2007): pp. 116–127.
Chapter 10 Managing Services for Business Markets
FIGURE 10.1
259
THE FIRST STEP IN UNDERSTANDING A CUSTOMER’S EXPERIENCE
IS TO DEVELOP A LIFE CYCLE MAP
A representative set of customer-company interactions
Relationship
initiation
Provider
evaluation
Account
setup
Product
reception
and use
Order
placement
Problem
resolution
Payment
Account
maintenance
The company
exposes the
customer to its
marketing message
The customer
gets initial price
and lead-time
quotes
The customer
obtains materials
for account
setup
The
customer
selects the
product
The customer
tracks
order
status
The customer
files a claim
and obtains
resolution
The customer
receives
and validates
the invoice
The customer
maintains
profile
information
The customer
seeks relevant
information
The customer
puts out an
RFP
The customer
provides account
profile information
The customer
places the order
(fills out the
order form)
The company
and the customer
arrange the final
delivery terms
The customer
The customer
notifies the company makes the
payment
of a problem and
obtains resolution
The customer
maintains
supplies
The customer
evaluates
providers and
negotiates
terms and pricing
The
company
confirms
setup and
activation
The customer
receives and
inspects
the product
The customer
seeks an invoice
adjustment and
obtains resolution
The customer
selects the
provider
The company
performs courtesy
follow-up
The customer
prepares specialty
documents when
required (for
example, for
rush delivery)
The customer
requests product
information
The company
and the customer
arrange initial
delivery terms
The customer
refuses or accepts
the product
The company
provides general
support (not
related to problems)
The customer
obtains
ongoing
price quotes
SOURCE: David Rickard, “Winning by Understanding the Full Customer Experience,” The Boston Consulting Group, Inc., 2007, p. 6. Accessed
on July 26, 2008 at http://www.bcg.com. All rights reserved. Reproduced by permission.
8 percent described their experience as “superior,” yet 80 percent of the companies
surveyed believed that the experience that they were delivering was indeed superior.5
By focusing narrowly only on core-related product elements and overlooking the full
customer experience, companies “can end up losing customers without understanding
why. Moreover, such companies are missing out on some powerful opportunities to
create value and cement their customers’ loyalty,” says David Rickard, vice president,
The Boston Consulting Group.6
Customer experience represents the internal and subjective response a business
customer has to any direct or indirect contact with a company. We will devote special
attention to touchpoints—those instances where the customer has direct contact with
either the product or service itself or with representatives of it by a third party, such as
a channel partner. A customer experience map provides a valuable tool for diagnosing
key touchpoints or interactions between the company and the customer from the moment contact is made with a potential customer through the maintenance of an ongoing
relationship (see Figure 10.1). Developed from interviews with customers, the map provides a foundation for defining what’s most important in your customers’ experience.
5Ibid., p. 117.
6David Rickard, “Winning by Understanding the Full Customer Experience,” The Boston Consulting Group, Inc., 2006,
p. 1, accessed at http://www.bcg.com on May 15, 2008.
260 Part IV
Formulating Business Marketing Strategy
Applying the Customer Experience Map
The map was developed by the Boston Consulting Group for a large industrial-goods
company that faced this dilemma: Traditional measures of product quality continued
to indicate superb performance, but customer satisfaction remained stagnant and the
company was losing market share.7 Once the customer experience map is developed,
the next step is to meet with customers and pare down the list to a smaller set of the
most critical interactions and product and service characteristics. The ultimate goal
of the analysis is to identify (1) the value that customers place on different levels of
performance (for example, high, average, low) for each element of their experience,
(2) the customers’ minimal expectations for each element, and (3) the customers’
perception of the firm’s performance versus that of key competitors.
Based on the analysis, strategists at the industrial-goods company were surprised to learn that only 40 percent of customers’ most critical experiences were tied
to the core product, whereas 60 percent were related to softer considerations (for
example, the ease of making invoice corrections and resolving problems). This revelation proved crucial to understanding why the company was losing market share even
though its customers’ ratings of product quality were improving.
Customer Experience Management
Recall from Chapter 4 that customer relationship management captures what a
company knows about a particular customer. Christopher Meyer and Andre
Schwager persuasively argue that there is a corresponding need for well-developed
customer experience management processes that capture customers’ subjective
thoughts about a particular company.8 Such an approach requires surveys and targeted studies at points of customer interaction that identify gaps between customer
expectations and their actual experience. “Because a great many customer experiences aren’t the direct consequence of the brand’s message or the company’s actual
offerings . . . the customers themselves . . . must be monitored and probed.”9
A Solution-Centered Perspective10
As global competition intensifies and product differentiation quickly fades, strategists at leading firms from General Electric and IBM to Staples and Home Depot are
giving increased attention to services, particularly a solution-centric mindset. Rather
than starting with the product, a solution-centered approach begins with an analysis
of a customer problem and ends by identifying the products and services required to
solve the problem. Rather than transaction based, the focus of the exchange process
is interaction based, and value is co-created by the firm in concert with the customer
(Table 10.1). So, customer offerings represent an “integrated combination of products and services designed to provide customized experiences for specific customer
segments.”11 Services, as a critical feature of the solution, become a valuable basis for
competitive advantage and an important driver of profitability.
7This illustration is based on Rickard, ibid., p. 5.
8Meyer and Schwager, “Understanding Customer Experiences.”
9Ibid., p. 116.
10Except where noted, this section draws on Mohanbir Sawhney, “Going Beyond the Product: Defining, Designing, and
Delivering Customer Solutions,” Working Paper, Kellogg School of Management, Northwestern University, December
2004, pp. 1–10.
11Ibid., p. 4.
Chapter 10 Managing Services for Business Markets
TABLE 10.1
261
FROM A PRODUCT TO A SOLUTIONS PERSPECTIVE
Value Proposition
Value Creation
Product Perspective
Solutions Perspective
Win by creating innovative
products and enriching
features of existing products
Value is created by the firm
Win by creating and delivering
superior customer solutions
Designing Offerings
Start with the product or
service, and then target
customer segments
Company-Customer
Relationship
Transaction-based
Focus on Quality
Quality of internal processes
and company offerings
Value is co-created by the
customer and the firm
Start with the customer
problem, and then assemble
required products and services
to solve the problem
Interaction-based and centered
on the co-creation of solutions
Quality of customer–firm
interactions
SOURCE: Adapted from Mohanbir Sawhney, “Going Beyond the Product: Defining, Designing, and Delivering
Customer Solutions,” Working Paper, Kellogg School of Management, Northwestern University, December 2004; and
C. K. Prahalad and Venkat Ramaswamy, The Future of Competition: Co-Creating Unique Value with Customers (Boston:
Harvard Business School Press, 2004).
UPS Solutions United Parcel Services of America began by mastering a narrow set
of activities involved in the package delivery system—picking up, shipping, tracking,
and delivering packages. Adopting a solution-centered focus, UPS tapped new market
opportunities:12
• Designing transportation networks that reduced the time Ford needed to deliver
vehicles from its plants to dealers by up to 40 percent;
• Managing the movement of National Semiconductor’s products from its
manufacturing plants to customers around the world and helping the customer
reduce shipping and inventory costs by 15 percent;
• Partnering with Nike and managing all the back-office processes for direct
selling from order management and delivery to customer support.
Determine Unique Capabilities In developing solutions, business marketing firms
must define their unique capabilities and determine how to use them to help customers reduce costs, increase responsiveness, or improve quality. In some cases, this
may involve taking in some of the work or activities that customers now perform. To
illustrate, DuPont first sold paint to Ford but now runs Ford’s paint shops. “DuPont,
which is paid on the basis of the number of painted vehicles, actually sells less paint
than before because it has an incentive to paint cars with the least amount of waste.
But the company makes more money as a result of the improved efficiency.”13 The
12Mohanbir Sawhney, Sridhar Balasubramanian, and Vish V. Krishnan, “Creating Growth with Services,” MIT Sloan
Management Review 45 (Winter 2004): pp. 34–43.
13Ibid., p. 39.
262 Part IV
Formulating Business Marketing Strategy
INSIDE BUSINESS MARKETING
Do Service Transition Strategies Pay Off ?
To improve their competitive position in the era
of intense global competition and the increasing
commoditization that characterizes many product
markets, a host of manufacturing firms have added
services to their existing product offerings. If
successful, such service transition strategies could make
the firm’s value proposition more unique, difficult for
rivals to duplicate, and valuable to customers, thereby
enhancing profitability and firm value. Do these
service transition strategies pay off ? A recent study by
Eric Fang and his colleagues provides the answers.
• Before they can expect positive effects on firm
value, business marketing firms should recognize
that service transition strategies typically require
achieving a critical mass in sales, estimated to be
20 to 30 percent of total sales.
• Transitioning to services is significantly more
effective for companies that offer services related
to their core product business. Sales of unrelated
services demonstrate little impact on firm value.
• Adding services to a core product offering
increases firm value for companies in slow growth
and turbulent industries. However, “firms in
high growth industries can destroy firm value by
shifting their focus . . . to service initiatives. In
stable (low turbulence) industries, adding services
has a negative effect on firm value. . . .”
SOURCE: Eric (Er) Fang, Robert W. Palmatier, and Jan-Benedict
E. M. Steenkamp, “Effect of Service Transition Strategies on Firm
Value,” Journal of Marketing, forthcoming.
DuPont example demonstrates a central point about solutions marketing: Products
provide the platform for the delivery of services.14
A recent research study suggests that companies can deliver more effective solutions at profitable prices if they adopt a stronger relationship focus.15 The authors
suggest that business marketers mistakenly view a solution as a customized and integrated combination of products and services for meeting a customer’s business needs.
In sharp contrast, customers view a solution as a set of customer–company relational
processes that involve “(1) customer requirements definition, (2) customization and
integration of goods and/or services and (3) their deployment, and (4) postdeployment
customer support, all of which are aimed at meeting customers’ business needs.”16
Once again, this highlights the importance of moving beyond a mere focus on transactions to consider the full set of customer experiences.
Benefits of Solution Marketing
By shifting from a product to a solutions strategy, business-to-business firms gain two
important benefits, namely, new avenues for growth and differentiation.
Creating Growth Opportunities Solutions create fresh opportunities for increasing the amount of business or share-of-wallet that a company receives from its customer base. An expanded portfolio of service-intensive offerings makes this possible.
Often, services represent a far larger market opportunity than the core product market.
14Stephen L. Vargo and Robert F. Lusch, “Evolving to a New Dominant Logic for Marketing,” Journal of Marketing 68
(January 2004): pp. 1–18.
15Kapil R. Tuli, Ajay K. Kohli, and Sundar R. Bharadwaj, “Rethinking Customer Solutions for Product Bundles to
Relational Process,” Journal of Marketing 71 (July 2007): pp. 1–17.
16Ibid., p. 1.
Chapter 10 Managing Services for Business Markets
263
To illustrate, Deere & Company, the agricultural equipment manufacturer, found that
the proportion of each dollar farmers spend on equipment has been declining for years
and that the bulk of that spending now goes for services. Moreover, by centering on
that profit pool, Deere is tapping into a market opportunity that is 10 times larger
than the equipment market. To that end, Deere provides a range of services for its
customers (for example, health insurance and banking) and is employing innovative
technologies to make the farmer’s life easier and more productive. For example, Deere
is experimenting with global positioning systems (GPS) and biosensors on its combines. C. K. Prahalad and Venkat Ramaswamy describe the initiative:
Imagine driverless combines and tractors with onboard sensors that can measure the oil content of grain or distinguish between weeds and crops. The
benefits are enormous. Farmers can ration herbicide according to soil conditions. GPS-guided steering ensures repeatable accuracy, eliminates overtreating of crops . . . thereby reducing time, fuel, labor, and chemical costs. . . .
Farmers can be more productive, minimizing the cost per acre.17
Sustaining Differentiation and Customer Loyalty As farmers view more and more
products as commodities, business marketers who emphasize solutions can sustain differentiation more effectively than rivals who maintain a strict focus on the core product
offering. Why? According to Mohanbir Sawhney, “Solutions offer many more avenues
for differentiation than products because they include a variety of services that can be
customized in many unique ways for individual customers.”18 Likewise, by developing a
rich network of relationships with members of the customer organization, co-creating
solutions with the customer, and becoming directly connected to the customer’s operations, they enhance customer loyalty and throw up severe barriers to competing firms
when they attempt to persuade the customer to switch suppliers.
Business Service Marketing:
Special Challenges
The development of marketing programs for both products and services can be
approached from a common perspective; yet the relative importance and form of
various strategic elements differ between products and services. The underlying
explanation for these strategic differences, asserts Henry Assael, lies in the distinctions between a product and a service:
Services are intangible; products are tangible. Services are consumed at the
time of production, but there is a time lag between the production and consumption of products. Services cannot be stored; products can. Services are
highly variable; most products are highly standardized. These differences
produce differences in strategic applications that often stand many product
marketing principles on their head.19
17C. K. Prahalad and Venkat Ramaswamy, The Future of Competition: Co-Creating Unique Value with Customers (Boston:
Harvard Business School Press, 2004), pp. 93–94.
18Mohanbir Sawhney, “Going Beyond the Product,” p. 6.
19Henry Assael, Marketing Management: Strategy and Action (Boston.: Kent Publishing, 1985), p. 693.
264 Part IV
Formulating Business Marketing Strategy
FIGURE 10.2
Tangible
Dominant
BUSINESS PRODUCT—SERVICE CLASSIFICATION BASED ON TANGIBILITY
Oil and Grease
Office Supplies
Machinery
Personal Computers
Telecommunications Systems
Meeting or Convention Hotel
Meeting or Convention Hotel
Advertising Agencies
Plant Janitorial and Cleaning
Freight Transportation
Management Consulting
Executive Management Seminars
Intangible
Dominant
SOURCE: Adapted from G. Lynn Shostack, “Breaking Free from Product Marketing,” Journal of Marketing 41 (April
1977): p. 77. Published by the American Marketing Association.
Thus, success in the business service marketplace begins with understanding the
meaning of service.
Services Are Different
There are inherent differences between goods and services, providing a unique set
of marketing challenges for service businesses and for manufacturers that provide services as a core offering. Put simply, services are deeds, processes, and performances.20
For example, a management consultant’s core offerings are primarily deeds and
actions performed for customers. The most basic, and universally recognized, difference between goods and services is intangibility. Services are more intangible
than manufactured goods, and manufactured goods are more tangible than services.
Because services are actions or performances, they cannot be seen or touched in the
same way that consumers sense tangible goods.
Tangible or Intangible?
Figure 10.2 provides a useful tool for understanding the product–service definitional
problem. The continuum suggests that there are very few pure products or pure services.
For example, a personal computer is a physical object made up of tangible elements
that facilitate the work of an individual and an organization. In addition to the computer’s physical design and performance characteristics, the quality of technical service support is an important dimension of the marketing program. Thus, most market
offerings comprise a combination of tangible and intangible elements.
Whether an offering is classified as a good or as a service depends on how the
organizational buyer views it—whether the tangible or the intangible elements dominate. On one end of the spectrum, grease and oil are tangible-dominant; the essence
of what is being bought is the physical product. Management seminars, on the other
20Valarie A. Zeithaml, Mary Jo Bitner, and Dwayne D. Gremler, Services Marketing: Integrating Customer Focus across the Firm,
5th ed. (Boston: McGraw-Hill Irwin, 2009), p. 2.
Chapter 10 Managing Services for Business Markets
265
hand, are intangible-dominant because what is being bought—professional development, education, learning—has few, if any, tangible properties. A convention hotel is
in the middle of the continuum because the buyer receives an array of both tangible
elements (meals, beverages, notepads, and so on) and intangible benefits (courteous
personnel, fast check-ins, meeting room ambiance, and so forth).
The concept of tangibility is especially useful to the business marketer because
many business offerings are composed of product and service combinations. The key
management task is to evaluate carefully (from the buyer’s standpoint) which elements
dominate. The more the market offering is characterized by intangible elements, the
more difficult it is to apply the standard marketing tools that were developed for
products. The business marketer must focus on specialized marketing approaches appropriate for services.
The concept of tangibility also helps the manager focus clearly on the firm’s total
market offering.21 In addition, it helps the manager recognize that a change in one
element of the market offering may completely change the offering in the customer’s
view. For example, a business marketer who decides to hold spare-parts inventory at
a central location and use overnight delivery to meet customer requirements must
refocus marketing strategy. The offering has moved toward the intangible end of the
continuum because of the intangible benefits of reduced customer inventory and fast
transportation. This new “service,” which is less tangible, must be carefully explained,
and the intangible results of lower inventory costs must be made more concrete to the
buyer through an effective promotion program.
In summary, business services are market offerings that are predominantly intangible. However, few services are totally intangible—they often contain elements with
tangible properties. In addition to tangibility, business services have other important
distinguishing characteristics that influence how they are marketed. Table 10.2 summarizes the core characteristics that further delineate the nature of business services.
Simultaneous Production and Consumption
Because services are generally consumed as they are produced, a critical element in the
buyer-seller relationship is the effectiveness of the individual who actually provides the
service—the IBM technician, the UPS driver, the McKinsey consultant. From the service firm’s perspective, the entire marketing strategy may rest on how effectively the
individual service provider interacts with the customer. Here the actual service delivery
takes place and the promise to the customer is kept or broken. This critical point of contact with the customer is referred to as interactive or real-time marketing. Recruiting,
hiring, and training personnel assume special importance in business service firms.
Service Variability
Observe in Table 10.2 that service is nonstandardized, meaning that the quality of the
service output may vary each time it is provided.22 Services vary in the amount of
21Arun Sharma, R. Krishnan, and Dhruv Grewal, “Value Creation in Markets: A Critical Area of Focus for Business-to-
Business Markets,” Industrial Marketing Management 30 (June 2001): pp. 391–402.
22 Valarie A. Zeithaml, A. Parasuraman, and Leonard R. Berry, “Problems and Strategies in Services Marketing,” Journal
of Marketing 49 (Spring 1985): p. 34; see also Zeithaml, Berry, and Parasuraman, “Communication and Control Processes
in the Delivery of Service Quality,” Journal of Marketing 52 (April 1988): pp. 35–48.
266 Part IV
Formulating Business Marketing Strategy
TABLE 10.2
UNIQUE SERVICE CHARACTERISTICS
Characteristics
Examples
Marketing Implications
Simultaneous production
and consumption
Telephone conference call;
management seminar;
equipment repair
Nonstandardized output
Management advice varies with
the individual consultant; merchandise damages vary from
shipment to shipment
Perishability: inability to
store or stockpile
Unfilled airline seats; an idle
computer technician;
unrented warehouse space
Lack of ownership
Use of railroad car; use of
consultant’s know-how; use
of mailing list
Direct-seller interaction requires that
service be done “right”; requires highlevel training for personnel; requires
effective screening and recruitment
Emphasizes strict quality control
standards; develop systems that
minimize deviation and human error;
prepackage the service; look for ways
to automate
Plan capacity around peak demand;
use pricing and promotion to even
out demand peaks and valleys; use
overlapping shifts for personnel
Focus promotion on the advantages of
nonownership: reduced labor, overhead,
and capital; emphasize flexibility
equipment and labor used to provide them. For example, a significant human element is involved in teaching an executive seminar compared with providing overnight
airfreight service. Generally, the more labor involved in a service, the less uniform
the output. In these labor-intensive cases, the user may also find it difficult to judge
the quality before the service is provided. Because of uniformity problems, business
service providers must focus on finely tuned quality-control programs, invest in “systems” to minimize human error, and seek approaches for automating the service.
Service Perishability
Generally, services cannot be stored; that is, if they are not provided at the time they
are available, the lost revenue cannot be recaptured. Tied to this characteristic is
the fact that demand for services is often unpredictable and widely fluctuating. The
service marketer must carefully evaluate capacity—in a service business, capacity is
a substitute for inventory. If capacity is set for peak demand, a “service inventory”
must exist to supply the highest level of demand. As an example, some airlines that
provide air shuttle service between New York, Washington, and Boston offer flights
that leave every hour. If, on any flight, the plane is full, another plane is brought to
the terminal—even for one passenger. An infinite capacity is set so that no single
business traveler is dissatisfied. Obviously, setting high capacity levels is costly, and
the marketer must analyze the cost versus the lost revenue and customer goodwill
that might result from maintaining lower capacity.
Nonownership
The final dimension of services shown in Table 10.2 is that the service buyer uses, but
does not own, the service purchased. Essentially, payment for a service is a payment for
the use of, access to, or hire of items. Renting or leasing is “a way for customers to
enjoy use of physical goods and facilities that they cannot afford to buy, cannot justify
Chapter 10 Managing Services for Business Markets
267
INSIDE BUSINESS MARKETING
To Sell Jet Engines, Teach Your Customer How to Sell Aircraft
A major segment of GE Transportation is the
General Electric Aircraft Engines division. This unit
is the world’s largest manufacturer of jet engines,
ranging from small 14,000-pound thrust engines
up to the giant GE90, a 115,000-pound thrust
engine that powers the Boeing 777. As important
as these engines are to GE’s profitability, the real
profits come from the service package surrounding
the sale of an engine. A jet engine lasts years, and
what often clinches a sale and leads to long-term
profits for GE is the full-service “package” that
accompanies the engine over its lifespan. One GE
marketing manager claims that “jet engines are
almost commodities; the key differentiator is the
lifetime service we offer our customers.”
Interestingly, the airline that buys a new
aircraft is generally the decision-making unit that
chooses the engine brand to be installed—not the
aircraft manufacturer, namely Boeing or Airbus.
Recognizing the importance of the airline in the
purchase process for jet engines, GE embarked on a
creative strategy. Several new aircraft manufacturers
began operations in China in the early 2000s as a
result of that country’s major economic growth.
One manufacturer, specializing in small, regional
jets (50- to 70-passenger capacity), selected GE
as the engine supplier in 2004, although the firm
would not produce an airplane until at least 2008.
The company was starting from scratch when it
selected GE engines for its planes.
GE immediately began working with the firm
to refine the plane’s design and engineering,
and these valuable services were one reason it
selected GE as the supplier. More importantly,
GE assigned one manager and a team of sales,
engineering, and marketing specialists to work
with the firm. One of GE’s first efforts was to
bring 25 sales and marketing managers from the
Chinese aircraft company to the United States for
two weeks of training. These managers represent
the personnel who will be selling the aircraft to
airline executives in China, as well as in many
other parts of the world. The two-week training
program centered on the basics of business-tobusiness marketing—something the Chinese knew
little about. GE brought in experienced faculty to
teach the Chinese and provided GE managers to
follow up on the training at later dates. What is
unique about this approach is that a supplier was
actually teaching the customer how to market and
sell! Of course, the benefits to GE are huge: If the
Chinese aircraft firm is effective at business-tobusiness selling to airlines, then more GE engines
will be demanded in the future.
purchasing, or prefer not to retain after use.”23 The service marketer must feature the
advantages of nonownership in its communications to the marketplace. The key benefits to emphasize are reductions in staff, overhead, and capital from having a third
party provide the service.
Although there may be exceptions, these characteristics provide a useful framework for understanding the nature of business services and isolating special marketing
strategy requirements. The framework suggests that different types of service providers should pursue different types of strategies because of the intangibility and heterogeneity of their services. In this case, providers of professional services (consulting, tax
advising, accounting, and so on) should develop marketing strategies that emphasize
word-of-mouth communication, provide tangible evidence, and employ value pricing
to overcome the issues created by intangibility and heterogeneity.24
23 Christopher Lovelock and Evert Gummesson, “Whither Services Marketing? In Search of a New Paradigm and Fresh
Perspectives,” Journal of Services Research 7 (August 2004): p. 36.
24 Michael Clemes, Diane Mollenkopf, and Darryl Burn, “An Investigation of Marketing Problems across Service
Typologies,” Journal of Services Marketing 14 (no. 6–7, 2000): p. 568; see also, Möllar, Rajala, and Westerlund, “Service
Innovation Myopia,” pp. 34–46.
268 Part IV
Formulating Business Marketing Strategy
Service Quality
Quality standards are ultimately defined by the customer. Actual performance by the
service provider or the provider’s perception of quality are of little relevance compared with the customer’s perception. “Good” service results when the service provider meets or exceeds the customer’s expectations.25 As a result, many management
experts argue that service companies should carefully position themselves so that customers expect a little less than the firm can actually deliver. The strategy: underpromise and overdeliver.
Dimensions of Service Quality
Because business services are intangible and nonstandardized, buyers tend to have
greater difficulty evaluating services than evaluating goods. Because they are unable
to depend on consistent service performance and quality, service buyers may perceive more risk.26 As a result, they use a variety of prepurchase information sources
to reduce risk. Information from current users (word of mouth) is particularly important. In addition, the evaluation process for services tends to be more abstract,
more random, and more heavily based on symbology rather than on concrete decision variables.27
Research provides some valuable insights into how customers evaluate service
quality. From Table 10.3, note that customers focus on five dimensions in evaluating
service quality: reliability, responsiveness, assurance, empathy, and tangibles. Among
these dimensions, reliability—delivery on promises—is the most important to customers. High-quality service performance is also shaped by the way frontline service
personnel provide it. To the customer, service quality represents a responsive employee, one who inspires confidence, and one who adapts to the customer’s unique
needs or preferences and delivers the service in a professional manner. In fact, the
performance of employees who are in contact with the customer may compensate
for temporary service quality problems (for example, a problem reoccurs in a recently repaired photocopier).28 By promptly acknowledging the error and responding quickly to the problem, the service employee may even strengthen the firm’s
relationship with the customer.
Customer Satisfaction and Loyalty
Four components of a firm’s offering and its customer-linking processes affect customer satisfaction:
1. The basic elements of the product or service that customers expect all
competitors to provide;
25 William H. Davidow and Bro Uttal, “Service Companies: Focus or Falter,” Harvard Business Review 67 (July–August
1989): p. 84.
26 Valarie A. Zeithaml, “How Consumer Evaluation Processes Differ between Goods and Services,” in Marketing of Services,
James H. Donnelly and William R. George, eds. (Chicago: American Marketing Association, 1981), pp. 200–204.
27 Ibid.
28 Christian Gronroos, “Relationship Marketing: Strategic and Tactical Implications,” Management Decision, 34 (no. 3,
1996): pp. 5–14.
Chapter 10 Managing Services for Business Markets
TABLE 10.3
269
THE DIMENSIONS OF SERVICE QUALITY
Dimension
Description
Examples
Reliability
Responsiveness
Delivering on promises
Being willing to help
Assurance
Inspiring trust and
confidence
Treating customers as
individuals
Representing the service
physically
Promised delivery date met
Prompt reply to customers’
requests
Professional and knowledgeable
staff
Adapts to special needs of
customer
Distinctive materials:
brochures, documents
Empathy
Tangibles
SOURCE: Adapted from Valarie A. Zeithaml, Mary Jo Bitner, and Dwayne D. Gremler, Services Marketing: Integrating
Customer Focus across the Firm, 5th ed. (Boston: McGraw-Hill Irwin, 2009), pp. 116–120.
2. Basic support services, such as technical assistance or training, that make the
product or service more effective or easier to use;
3. A recovery process for quickly fixing product or service problems;
4. Extraordinary services that so excel in solving customers’ unique problems or in
meeting their needs that they make the product or service seem customized.29
Leading service firms carefully measure and monitor customer satisfaction because it
is linked to customer loyalty and, in turn, to long-term profitability.30 Xerox, for example, regularly surveys more than 400,000 customers regarding product and service
satisfaction using a 5-point scale from 5 (high) to 1 (low). In analyzing the data, Xerox
executives made a remarkable discovery: Very satisfied customers (a 5 rating) were far
more loyal than satisfied customers. Very satisfied customers, in fact, were six times
more likely to repurchase Xerox products than satisfied customers.
Service Recovery
Business marketers cannot always provide flawless service. However, the way the firm
responds to a client’s service problems has a crucial bearing on customer retention
and loyalty. Service recovery encompasses the procedures, policies, and processes a
firm uses to resolve customer service problems promptly and effectively. For example,
when IBM receives a customer complaint, a specialist who is an expert in the relevant
product or service area is assigned as “resolution owner” of that complaint. On being assigned a customer complaint or problem, the IBM specialist must contact the
customer within 48 hours (except in the case of severe problems, where the required
29 Thomas O. Jones and W. Earl Sasser Jr., “Why Satisfied Customers Defect,” Harvard Business Review 73 (November–
December 1995): p. 90.
30 The Xerox illustration is based on James L. Heskett, Thomas O. Jones, Gary W. Loveman, W. Earl Sasser Jr., and
Leonard A. Schlesinger, “Putting the Service-Profit Chain to Work,” Harvard Business Review 72 (March–April 1994):
pp. 164–174.
270 Part IV
Formulating Business Marketing Strategy
response is made much faster). Larry Schiff, a marketing strategist at IBM, describes
how the process works from there:
They introduce themselves as owners of the customer’s problem and ask:
What’s it going to take for you to be very satisfied with the resolution of this
complaint? . . . Together with the customer, we negotiate an action plan and
then execute that plan until the customer problem is resolved. The problem
only gets closed when the customer says it is closed, and we measure this [that
is, customer satisfaction with problem resolution] as well.31
Service providers who satisfactorily resolve service failures often see that their
customer’s level of perceived service quality rises. One study in the ocean-freightshipping industry found that clients who expressed higher satisfaction with claims
handling, complaint handling, and problem resolution have a higher level of overall
satisfaction with the shipping line.32 Therefore, business marketers should develop
thoughtful and highly responsive processes for dealing with service failures. Some
studies have shown that customers who experienced a service failure and had it corrected to their satisfaction have greater loyalty to the supplier than those customers
who did not experience a service failure!
Zero Defections
The quality of service provided to business customers has a major effect on customer
“defections”—customers who do not come back. Service strategists point out that
customer defections have a powerful effect on the bottom line.33 As a company’s relationship with a customer lengthens, profits rise—and generally rise considerably. For
example, one service firm found that profit from a fourth-year customer is triple that
from a first-year customer. Many additional benefits accrue to service companies that
retain their customers: They can charge more, the cost of doing business is reduced,
and the long-standing customer provides “free” advertising. The implications are
clear: Service providers should carefully track customer defections and recognize that
continuous improvement in service quality is not a cost but, say Frederick Reichheld
and W. Earl Sasser, “an investment in a customer who generates more profit than the
margin on a one-time sale.”34
Return on Quality
A difficult decision for the business-services marketing manager is to determine how
much to spend on improving service quality. Clearly, expenditures on quality have
diminishing returns—at some point, additional expenditures do not increase profits.
To make good decisions on the level of expenditures on quality, managers must justify
31 Larry Schiff, “How Customer Satisfaction Improvement Works to Fuel Business Recovery at IBM,” Journal of
Organizational Excellence 20 (Spring 2001): p. 12.
32 Srinivas Durvasula, Steven Lysonski, and Subhash C. Mehta, “Business-to-Business Marketing: Service Recovery and
Customer Satisfaction Issues with Ocean Shipping Lines,” European Journal of Marketing 34 (no. 3–4, 2000): p. 441.
33 Frederick F. Reichheld and W. Earl Sasser, “Zero Defections: Quality Comes to Services,” Harvard Business Review
68 (September–October 1990): p. 105; see also, Frederick F. Reichheld, Loyalty Rules! How Today’s Leaders Build Lasting
Relationships (Boston: Harvard Business School Press, 2001).
34 Reichheld and Sasser, “Zero Defections,” p. 107.
Chapter 10 Managing Services for Business Markets
271
quality efforts on a financial basis, knowing where to spend on quality improvement,
how much to spend, and when to reduce or stop the expenditures. Roland Rust,
Anthony Zahorik, and Timothy Keiningham have developed a technique for calculating
the “return on investing in quality.”35 Under this approach, service quality benefits are
successively linked to customer satisfaction, customer retention, market share, and,
finally, to profitability. The relationship between expenditure level and customersatisfaction change is first measured by managerial judgment and then through market testing. When the relationship has been estimated, the return on quality can be
measured statistically. The significant conclusion is that quality improvements should
be treated as investments: They must pay off, and spending should not be wasted on
efforts that do not produce a return.
Marketing Mix for Business
Service Firms
Meeting the needs of service buyers effectively requires an integrated marketing strategy. First, target segments must be selected, and then a marketing mix must be tailored to the expectations of each segment. The business marketing manager must
give special consideration to each of the key elements of the service marketing mix:
development of service packages, pricing, promotion, and distribution.
In terms of the overall approach that firms develop to interact with their customers, business-to-business service firms are more likely to emphasize relationship
strategies as opposed to transactional strategies.36 Because the transactional mode involves an arm’s-length relationship, success in marketing business services hinges on
the business marketer’s ability to develop close and long-lasting ties with customers—
based on buyer-seller dependence. The emphasis in marketing business services is on
managing the total buyer-seller interaction process.
Segmentation
As with any marketing situation, development of the marketing mix is contingent on
the customer segment to be served. Every facet of the service, as well as the methods
for promoting, pricing, and delivering it, hinges on the needs of a reasonably homogeneous group of customers. The process for segmenting business markets described
in Chapter 5 applies in the services market. However, William Davidow and Bro
Uttal suggest that customer service segments differ from usual market segments in
significant ways.37
First, service segments are often narrower, often because many service customers expect services to be customized. Expectations may not be met if the service
received is standardized and routine. Second, service segmentation focuses on what
35 Roland T. Rust, Anthony J. Zahorik, and Timothy L. Keiningham, “Return on Quality (ROQ): Making Service
Quality Financially Accountable,” Journal of Marketing 59 (April 1995): pp. 58–70; see also Roland T. Rust, Katherine
N. Lemon, and Valarie A. Zeithaml, “Return on Marketing: Using Customer Equity to Focus Marketing Strategy,”
Journal of Marketing 68 (January 2004): pp. 109–127.
36 Nicole E. Coviello, Roderick J. Brodie, Peter J. Danaher, and Wesley J. Johnston, “How Firms Relate to Their Markets:
An Empirical Examination of Contemporary Marketing Practices,” Journal of Marketing 66 (Summer 2002): p. 38.
37 Davidow and Uttal, “Service Companies,” p. 79.
272 Part IV
Formulating Business Marketing Strategy
the business buyers expect as opposed to what they need. Assessing buyer expectations plays a major role in selecting a target market and developing the appropriate service package. This assessment is critical because so many studies have shown
large differences between the ways customers and suppliers define and rank different service activities.38
Because service-quality expectations play such an important role in determining
ultimate satisfaction with a service, they can be used to segment business-to-business
markets. One study in the mainframe software industry revealed significant differences between “software specialists” (software experts) and “applications developers”
(users of software) in the same firm regarding their expectations of new software. The
developers (users) had higher expectations about the quality of a supplier’s equipment,
its employees’ responsiveness, and the amount of personal attention provided.39 The
study concluded that different buying-center members may well have different perspectives and different expectations of service quality. The business marketer should
carefully evaluate the possibility of using service-quality expectations as a guide for
creating marketing strategy.
Finally, segmenting service markets helps the firm adjust service capacity more
effectively. Segmentation usually reveals that total demand is made up of numerous
smaller, yet more predictable, demand patterns. A hotel can individually forecast and
adjust its capacities to the demand patterns of convention visitors, business travelers,
foreign tourists, or vacationers.
Service Packages
The service package can be thought of as the product dimension of service, including decisions about the essential concept of the service, the range of services provided,
and the quality and level of service. In addition, the service package must consider
some unique factors—the personnel who perform the service, the physical product
that accompanies the service, and the process of providing the service.40 A useful way
to conceptualize the service product is shown in Figure 10.3.
Customer-Benefit Concept Services are purchased because of the benefits they
offer, and a first step in either creating a service or evaluating an existing one is to
define the customer-benefit concept—that is, evaluate the core benefit the customer derives from the service. Understanding the customer-benefit concept focuses the business marketer’s attention on those attributes—functional, effectual,
and psychological—that must be not only offered but also tightly monitored from a
quality-control standpoint. For example, a sales manager selecting a resort hotel for
an annual sales meeting is purchasing a core benefit that could be stated as “a successful meeting.” The hotel marketer must then assess the full range of service attributes
and components necessary to provide a successful meeting. Obviously, a wide variety of service elements come into play: (1) meeting-room size, layout, environment,
38 Ibid., p. 83.
39 Leyland Pitt, Michael H. Morris, and Pierre Oosthuizen, “Expectations of Service Quality as an Industrial Market Seg-
mentation Variable,” Service Industries Journal 16 (January 1996): pp. 1–9; see also Ralph W. Jackson, Lester A. Neidell,
and Dale A. Lunsford, “An Empirical Investigation of the Differences in Goods and Services as Perceived by Organizational Buyers,” Industrial Marketing Management 24 (March 1995): pp. 99–108.
40 Donald Cowell, The Marketing of Services (London: William Heinemann, 1984), p. 73.
Chapter 10 Managing Services for Business Markets
FIGURE 10.3
Level 1
273
CONCEPTUALIZING THE SERVICE PRODUCT
Concerned with what
benefits customers or
clients seek
Customer-Benefit
Concept
Translated into
Level 2
Concerned with what general
benefits the service
organization will offer
Service Concept
Translated into
Level 3
Service Offer
Concerned with more detailed
shaping of the service
concept. Decisions on and
clarification of:
• service elements (tangible
and intangible)
• service forms (in what
way, how)
• service levels (quality
and quantity)
Translated into
Level 4
Service-Delivery
System
Creation and delivery of
the service product using
guidelines built into the
service offer. Concerned
with people, processes,
facilities, etc.
SOURCE: Adapted from Donald Cowell, The Marketing of Services (London: William Heinemann, Ltd., 1984), p. 100.
acoustics; (2) meals; (3) comfortable and quiet sleeping rooms; (4) audiovisual equipment; and (5) staff responsiveness.
Service Concept Once the customer-benefit concept is understood, the next step is
to articulate the service concept, which defines the general benefits the service company will provide through the bundle of goods and services it sells to the customer.
The service concept translates the customer-benefit concept into the range of benefits
the service marketer will provide. For a hotel, the service concept might specify the
benefits that it will develop: flexibility, responsiveness, and courteousness in providing
meeting rooms; a full range of audiovisual equipment; flexible meal schedules; message services; professional personnel; and climate-controlled meeting rooms.
Service Offer Intimately linked with the service concept is the service offer, which
spells out in more detail those services to be offered; when, where, and to whom they
will be provided; and how they will be presented. The service elements that make
up the total service package, including both tangibles and intangibles, must be determined. The service offer of the hotel includes a multitude of tangible elements
(soundproof meeting rooms, projection equipment, video players, slide projectors,
274 Part IV
Formulating Business Marketing Strategy
flip charts, refreshments, heating and air-conditioning, meals) and intangible elements
(attitude of meeting-room setup personnel, warmth of greetings from desk clerks and
bellhops, response to unique requests, meeting-room ambiance). Generally, management finds it easier to manage the tangible (equipment and physical) elements of the
service than to control the intangible elements.
Service Delivery System The final dimension of the service product is the service
delivery system—how the service is provided to the customer. The delivery system
includes carefully conceived jobs for people; personnel with capabilities and attitudes
necessary for successful performance; equipment, facilities, and layouts for effective
customer work flow; and carefully developed procedures and processes aimed at a
common set of objectives.41 Thus, the service delivery system should provide a carefully designed blueprint that describes how the service is rendered for the customer.
For physical products, manufacturing and marketing are generally separate and
distinct activities; for services, these two activities are often inseparable.42 The service
performance and the delivery system both create the product and deliver it to customers. This feature of services underscores the important role of people, particularly
service providers, in the marketing process. Technicians, repair personnel, and maintenance engineers are intimately involved in customer contact, and they decidedly
influence the customer’s perception of service quality. The business service marketer
must pay close attention to both people and physical evidence (tangible elements such
as uniforms) when designing the service package.
Lean Consumption James Womack and Daniel Jones suggest that the concept of
“lean consumption” provides an effective way to think about how services are used.43
Lean consumption is focused on providing the full value that buyers desire from
their goods and services, with the greatest efficiency and least trouble. When a business buys a computer system, for example, this is not a one-time transaction. The
company has embarked on the arduous process of researching, obtaining, integrating, maintaining, upgrading, and finally, disposing of this product. For computer
manufacturers (whether employees, managers, or entrepreneurs), developing lean
consumption processes requires determining how to configure linked business activities, especially across firms, to meet customer needs without wasting their own—or
the customer’s—time, effort, and resources. These favorable results are achieved by
tightly integrating and streamlining the processes of provision and consumption. This
approach has been pursued effectively by Fujitsu Services, a leading global provider of
outsourced customer service. Companies that contract with Fujitsu to manage their
in-house information technology help desks find that the number of calls their desks
receive about a recurring problem—say, malfunctioning printers—often falls to near
zero. What Fujitsu does is identify and fix the source of the problem—for example,
replace the flawed printers with new ones. By seeking the root cause of the problem
somewhere up the value stream (often involving multiple companies), Fujitsu has pioneered a way to eliminate problems and reduce costs.44
41 James L. Heskett, Managing in the Service Economy (Boston: Harvard Business School Press, 1986), p. 20.
42 Cowell, The Marketing of Services, p. 110.
43 James Womack and Daniel Jones, “Lean Consumption,” Harvard Business Review 83 (March 2005): p. 60.
44 Ibid., p. 61.
Chapter 10 Managing Services for Business Markets
275
Service Personnel A first step in creating an effective service package is to ensure that all personnel know, understand, and accept the customer-benefit concept.
As Donald Cowell states, “So important are people and their quality to organizations
and . . . services that ‘internal marketing’ is considered to be an important management role to ensure that all staff are customer conscious.”45 In short, the attitudes,
skills, knowledge, and behavior of service personnel have a critical effect on the customer’s level of satisfaction with the service.
Pricing Business Services
Although product and service pricing policies and strategies share many common
threads, the unique characteristics of services create some special pricing problems
and opportunities.
Perishability and Managing Demand/Capacity The demand for services is rarely
steady or predictable enough to avoid service perishability. An extremely difficult decision for the business service marketer is to determine the capacity (inventory) of the
system: Should it meet peak demand, average demand, or somewhere in between?
Pricing can be used to manage the timing of demand and align it with capacity.
To manage demand, the marketer may offer off-peak pricing schemes and price
incentives for service orders placed in advance. For example, resort hotels, crowded
with pleasure travelers during school vacations and holidays, develop special packages
for business groups during the off-season. Similarly, utilities may offer significant rate
reductions for off-peak usage. It may also be possible, depending on demand elasticity and competition, to charge premium rates for services provided at peak demand
periods. Interestingly, however, a recent study showed that many service firms do not
reduce prices to increase business during slow periods.46
Service Bundling Many business services include a core service as well as various
peripheral services. How should the services be priced—as an entity, as a service bundle, or individually? Bundling is the practice of marketing two or more services in a
package for a special price.47 Bundling makes sense in the business service environment
because most service businesses have a high ratio of fixed costs to variable costs and a
high degree of cost sharing among their many related services. Hence, the marginal
cost of providing additional services to the core service customer is generally low.
A key decision for the service provider is whether to provide pure or mixed bundling.48 In pure bundling, the services are available only in bundled form—they cannot be purchased separately. In mixed bundling, the customer can purchase one or
more services individually or purchase the bundle. For example, a public warehouse
firm can provide its services—storage, product handling, and clerical activities—in a
price-bundled form by charging a single rate (8 cents) for each case the warehouse
receives from its manufacturer-client. Or the firm may market each service separately
and provide a rate for each service individually (3 cents per case for storage, 4 cents
45 Cowell, The Marketing of Services, p. 110; see also, Francis X. Frei, “The Four Things a Service Business Must Get
Right,” Harvard Business Review 86 (April 2008): pp. 70–80.
46 Zeithaml, Parasuraman, and Berry, “Problems and Strategies in Services Marketing,” p. 41.
47 Joseph P. Guiltinan, “The Price Bundling of Services: A Normative Framework,” Journal of Marketing 51 (April 1987): p. 74.
48 Ibid., p. 75.
276 Part IV
Formulating Business Marketing Strategy
per case for handling, and 1 cent per case for clerical). Additionally, a multitude of
peripheral services can be quoted on an individual basis: physical inventory count,
freight company selection and routing, merchandise return and repair, and so on. In
this way, the customer can choose the services desired and pay for each separately.
Creating a Service-Savvy Sales Force49 As companies move away from productrelated services into more elaborate customer solutions, a new set of challenges are
presented to salespeople: Services require a long sales cycle and a complex sales process that often involves the participation of senior executives on both the buying and
selling sides. To develop a focused strategy, the sales force at GE Healthcare includes
both product and service specialists. The product salespeople are called “hunters,”
centering their attention on securing customer orders for new equipment. Service
salespeople are “farmers”; GE expects them to nurture and develop relationships,
growing the service business over time.
Isolate Service Profitability In many industries, firms often supply customers with
myriad services such as next-day delivery, customized handling, and specialized labeling. However, not all companies track the real costs of the many services they offer
and they have no concrete data on net profit margins. As a result, the high-volume
customers who receive the lion’s share of these services may be far less profitable
than companies think. As business marketers develop and price service offerings,
they should give special attention to cost-to-serve particular customers and market
segments50 (see Chapter 4). By incorporating cost-to-serve data into the calculation
of gross margin, business marketing strategists are better equipped to price services,
identify unprofitable customers, and take action to restore profitability.
Services Promotion
The promotional strategies for services follow many of the same prescriptions as
those for products. However, the unique characteristics of business services pose special challenges for the business marketer.
Developing Tangible Clues Service marketers must concentrate either on featuring
the physical evidence elements of their service or on making the intangible elements
more tangible. Physical evidence plays an important role in creating the atmosphere
and environment in which a service is bought or performed, and it influences the customer’s perception of the service. Physical evidence is the tangible aspect of the service
package that the business marketer can control. Attempts should be made to translate
the image of a service’s intangible attributes into something more concrete.
For business service marketers, uniforms, logos, written contracts and guarantees,
building appearance, and color schemes are some of the many ways to make their services tangible. An equipment maintenance firm that provides free, written, quarterly
inspections helps make its service more tangible. Xerox, IBM, and FedEx offer service
guarantees for selected offerings. The credit card created by car rental companies
is another example of an attempt to make a service more tangible. A key concern
for the service marketer is to develop a well-defined strategy for managing physical
evidence—to enhance and differentiate service evidence by creating tangible clues.
49 Werner Reinartz and Wolfgang Ulaga, “How to Sell More Services Profitably,” Harvard Business Review 86 (May
2008): pp. 90–96.
50 Remko Van Hoek and David Evans, “When Good Customers Are Bad,” Harvard Business Review 83 (September 2005): p. 9.
Chapter 10 Managing Services for Business Markets
277
Services Distribution
Distribution decisions in the service industry are focused on how to make the service
package available and accessible to the user. Direct sale may be accomplished by the
user going to the provider (for example, a manufacturer using a public warehouse for
storing its product) or, more often, by the provider going to the buyer (for example,
photocopier repair). Services can also be delivered over the Internet or provided by
channel members.
Delivering Services Through the Internet The Internet provides a powerful
new channel for a host of services. For example, application service providers serve
business market customers by allowing them to rent access to computer software and
hardware, often providing the access over the Internet.51 To illustrate, for Dunn and
Bradstreet, IBM pulls together credit information on 63 million companies, handles
customer support and electronic credit-report distribution, and identifies good customer prospects with its analytic software.52
Channel Members Some manufacturers simply rely on their channel members to
provide the services associated with the product. Because wholesalers and distributors
are much closer to the customer, this arrangement can be a cost-effective way to deliver
installation, repair, and maintenance services. IBM, although well known for its physical
products, transformed itself into a services firm as a way to gain competitive advantage.
While using a direct sales force to sell its services to large corporate customers, IBM
found it difficult to cover the vast middle market in a cost-effective way. The middle
market comprises customers with fewer than 2,000 employees or less than $500 million
in revenue. IBM’s solution was to rely on business partners (channel members) to sell
its services to these customers and to provide continuous support to partners and customers via the Internet. In this way, IBM expands its market coverage, responds to the
service needs of customers, and increases the profitability and loyalty of its partners.53
Developing New Services54
In line with our discussion of the new-product-development process (see Chapter 9),
research suggests that there are a small set of success factors that drive the outcome
of new service ventures. Included here are ensuring an excellent fit to customer
needs, involving expert front-line service managers in creating the new service and
in helping customers appreciate its distinctive benefits, and implementing a formal
and planned launch for the new service offering. Moreover, the study found, for
new-to-the-world business services, the primary distinguishing feature impacting
performance is the corporate culture—one that actively promotes entrepreneurship,
encourages creativity, and includes the direct involvement of senior managers in
the new-service-development process.
51 Jon G. Auerbach, “Playing the New Order: Stocks to Watch as Software Meets the Internet,” The Wall Street Journal,
November 15, 1999, p. R28.
52 Steve Hamm, “Beyond Blue,” Business Week, April 18, 2005, pp. 68–76.
53 Craig Zarley, Joseph Kovar, and Edward Moltzen, “IBM Reaches,” Computer Reseller News 26 (February 2001): p. 14.
54 Ulrike de Brentani, “Innovative versus Incremental New Business Services: Different Keys for Achieving Success,”
Journal of Product Innovation Management 18 (no. 3, 2001): pp. 169–187; see also, Adegoke Oke, “Innovation Types and
Innovation Management Practices in Service Companies,” International Journal of Operations & Production Management 27
(no. 6, 2007): pp. 564–587.
278 Part IV
Formulating Business Marketing Strategy
Summary
Customer satisfaction represents the culmination of a set of customer experiences
with the business-to-business firm. A customer experience map provides a powerful
platform for defining the most critical customer–company interactions, uncovering
customer expectations, and spotting opportunities to create value and strengthen
customer loyalty. Rather than selling individual products and services, leading-edge
business-to-business firms focus on what customers really want—solutions. To design
a solution, the business marketing manager begins by analyzing a customer problem
and then identifies the products and services required to solve that problem. Because
solutions can be more readily customized for individual customers, they provide more
avenues for differentiation than products can offer.
Business services are distinguished by their intangibility, linked production and
consumption, lack of standardization, perishability, and use as opposed to ownership. Together, these characteristics have profound effects on how services should
be marketed. Buyers of business services focus on five dimensions of service quality:
reliability, responsiveness, assurance, empathy, and tangibles. Because of intangibility and lack of uniformity, service buyers have significant difficulty in comparing and
selecting service vendors. Service providers must address this issue in developing their
marketing mix.
The marketing mix for business services centers on the traditional elements—
service package, pricing, promotion, and distribution—as well as on service personnel, service delivery system, and physical evidence. The goal of the services marketing
program is to create satisfied customers. A key first step in creating strategies is to
define the customer-benefit concept and the related service concept and offer. Pricing
concentrates on influencing demand and capacity as well as on the bundling of service
elements. Promotion emphasizes developing employee communication, enhancing
word-of-mouth promotion, providing tangible clues, and developing interpersonal
skills of operating personnel. Distribution is accomplished through direct means, intermediaries, or the Internet. Firms, large and small, are using the Internet to forge
closer relationships with customers and to deliver a vast array of new services. New
service marketing can improve effectiveness by creating an organizational culture that
fosters risk taking and innovation. Successful new services respond to carefully defined market needs, capitalize on the strengths and reputation of the firm, and issue
from a well-planned new-service-development process.
Discussion Questions
1. Local contractors who handle home remodeling and other building
projects turn to Home Depot or Lowe’s for many products, tools,
and materials. Describe how these retailers could adopt a solutions
marketing focus to serve those customers.
2. When a company buys a high-end document processor from Xerox
or Canon, it is buying a physical product with a bundle of associated
services. Describe some of the services that might be associated with
such a product. Develop a list of the elements or points of interaction
that might be reflected in a customer experience map. How can buyers
evaluate the quality or value of these services?
Chapter 10 Managing Services for Business Markets
279
3. Explain why the growth opportunities for many firms, such as IBM or
GE, are far greater in services than they are in products.
4. Leading service companies such as American Express and FedEx
measure customer satisfaction on a quarterly basis across the global
market. Discuss the relationship between customer satisfaction and
loyalty.
5. Many firms have a recovery process in place for situations when their
products or services fail to deliver what has been promised to the
customer. Illustrate how such a process might work.
6. A new firm creates Web sites and electronic commerce strategies for
small businesses. Describe the essential elements to be included in its
service product.
7. What is the role of physical evidence in the marketing of a business
service?
8. As a luxury resort hotel manager, what approaches might you utilize to
manage business demand for hotel space?
9. Critique this statement: “A key dimension of success in services
marketing, as opposed to products marketing, is that operating
personnel in the service firm play a critical selling and marketing role.”
10. What steps can a manager take to enhance the chances of success for a
new business service?
Internet Exercise
1. Autodesk, Inc., a leading design software and digital content company,
provides online collaborative services for the building industry that
enables more effective management of all project information. Go to
http://www.buzzsaw.com and describe the service solutions Autodesk
provides for architects and engineers.
CASE
SafePlace Corporation55
In February 2002, a guest staying at the Hilton in Cherry Hill, New Jersey, died while
attending a convention. Several other guests were sent to the hospital amid fears of an outbreak of Legionnaires’ disease or an anthrax attack. Later, it was determined that the guest
had died from pneumonia and a blood infection unrelated to the hotel. The alarm surrounding this incident illustrates how important safety has become to a hotel’s business.
In response to this need, John C. Fannin III, a fire protection and industrial security expert, formed and is the president of the SafePlace Corporation. The firm is an
independent provider of safety accreditation of lodging, health care, educational, and
commercial buildings and other occupancies where the safety of people is a concern.
Like the “Good Housekeeping Seal of Approval,” SafePlace® Accreditation requirements are based on the security, fire protection, and health and life safety provisions of
selected nationally recognized codes, standards, and best practices.
The Hotel duPont in Wilmington, Delaware, was the first lodging facility in the
United States to receive the SafePlace seal of approval. Such an accreditation process
involves a rigorous inspection of the facility and identifies the best practices the hotel
should employ, such as the use of key cards (as opposed to keys), self-closing doors,
smoke detectors and sprinklers in the guest rooms, throw-bolt locks on the doors, excellent water quality, and safe work and food-handling practices among the hotel staff.
The Hotel duPont, which paid a $45,000 fee for the inspection and consulting services, displays the SafePlace seal in the lobby and plans to feature the credential on all
of the hotel’s marketing materials. Other early adopters of the SafePlace program are
New Orleans’ Hotel Montcleone and the Sagamore in Bolton Landing, New York.
Both report that their approvals have led to increased business.
Tricia Hayes, director of marketing at The Sagamore said that SafePlace has
brought meeting-planner attention to her facility and management comfort in adopting best risk-management practices. “Our accreditation has had a big impact on meeting professionals. Our sales managers use it as a sales tool.”
Since launching its program, SafePlace is doing particularly well with independent hotels that, according to Fannin, are “quicker to respond to customer preferences than a chain
would be.” In turn, Fannin feels that there is a huge opportunity in the education market,
particularly with colleges and universities (for example, the accreditation of dormitories).
Discussion Questions
1. Describe the core service concept and benefits that SafePlace provides to a hotel
and its guests. How would you describe these benefits in the body of an ad?
2. What steps could John Fannin take to fuel the growth of SafePlace?
3. Assess the prospects for SafePlace in the education market and suggest a potential
strategy the firm might follow to penetrate this market.
55 Maureen Milford, “Hotel Safety Rises to a New Standard,” The News Journal, May 13, 2002, p. i, accessed at http://
safeplace.com on September 27, 2002; , and “SafePlace Makes Hospitality Inroads,” Lodging Hospitality, February 2005,
accessed at http://www.safeplace.com on October 15, 2005; and Ruth Hill, “What Hotel Guests Want Today: A Safe Haven
in a Secure Property,” HSMAI Marketing Review, Fall 2005, accessed at http://www.safeplace.com on July 22, 2008.
280
CHAPTER
11
Managing Business
Marketing Channels
The channel of distribution is the marketing manager’s bridge to the market. Channel innovation represents a source of competitive advantage that separates market
winners from market losers. The business marketer must ensure that the firm’s
channel is properly aligned to the needs of important market segments. At the same
time, the marketer must also satisfy the needs of channel members, whose support is
crucial to the success of business marketing strategy. After reading this chapter, you
will understand:
1. the alternative paths to business market customers.
2. the critical role of industrial distributors and manufacturers’ representatives in marketing channels.
3. the central components of channel design.
4. requirements for successful channel strategy.
281
282 Part IV
Formulating Business Marketing Strategy
Go to Market Strategy, an influential book by Lawrence G. Friedman, aptly describes
the central focus of a channel strategy in the business market:
The success of every go-to-market decision you make, indeed your ability to
make smart go-to-market decisions at all, depends on how well you understand your customers. . . . You must build an accurate customer fact-base that
clarifies who the customers are in your target market, what they buy, how
they buy it, how they want to buy it, and what would motivate them to buy
more of it from you.1
The channel component of business marketing strategy has two important and related dimensions. First, the channel structure must be designed to accomplish marketing objectives. However, selecting the best channel to accomplish objectives is
challenging because (1) the alternatives are numerous, (2) marketing goals differ, and
(3) business market segments are so various that separate channels must often be used
concurrently. The ever-changing business environment requires managers periodically to reevaluate the channel structure. Stiff competition, new customer requirements, and the rapid growth of the Internet are among the forces that create new
opportunities and signal the need for fresh channel strategies.2
Second, once the channel structure has been specified, the business marketer
must manage the channel to achieve prescribed goals. To do so, the manager must
develop procedures for selecting intermediaries, motivating them to achieve desired
performance, resolving conflict among channel members, and evaluating performance. This chapter provides a structure for designing and administering the business marketing channel.
The Business Marketing Channel
The link between manufacturers and customers is the channel of distribution. The
channel accomplishes all the tasks necessary to effect a sale and deliver products to
the customer. These tasks include making contact with potential buyers, negotiating, contracting, transferring title, communicating, arranging financing, servicing the
product, and providing local inventory, transportation, and storage. These tasks may
be performed entirely by the manufacturer or entirely by intermediaries, or may be
shared between them. The customer may even undertake some of these functions; for
example, customers granted certain discounts might agree to accept larger inventories
and the associated storage costs.
Fundamentally, channel management centers on these questions: Which channel
tasks will be performed by the firm, and which tasks, if any, will be performed by channel
members? Figure 11.1 shows various ways to structure business marketing channels.
Some channels are direct—the manufacturer must perform all the marketing functions needed to make and deliver products. The manufacturer’s direct sales force and
online marketing channels are examples. Others are indirect; that is, some type of
intermediary (such as a distributor or dealer) sells or handles the products.
1 Lawrence G. Friedman, Go to Market: Advanced Techniques and Tools for Selling More Products, to More Customers, More
Profitably (Boston: Butterworth-Heinemann, 2002), p. 116.
2 Bert Rosenbloom, “Multi-Channel Strategy in Business-to-Business Markets,” Industrial Marketing Management
36 (January 2007): pp. 4–7.
Chapter 11 Managing Business Marketing Channels
FIGURE 11.1
283
B2B MARKETING CHANNELS
Manufacturer
Direct Channels
Direct
Sales
Online
Marketing
Indirect Channels
Telemarketing
Manufacturers’
Representatives
Industrial
Distributors
Customer Segments
A basic issue in channel management, then, is how to structure the channel so that
the tasks are performed optimally. One alternative is for the manufacturer to do it all.
Direct Channels
Direct distribution, common in business marketing, is a channel strategy that does
not use intermediaries. The manufacturer’s own sales force deals directly with the
customer, and the manufacturer has full responsibility for performing all the necessary channel tasks. Direct distribution is often required in business marketing because of the nature of the selling situation or the concentrated nature of industry
demand. The direct sales approach is feasible when (1) the customers are large and
well defined, (2) the customers insist on direct sales, (3) sales involve extensive negotiations with upper management, and (4) selling has to be controlled to ensure that
the total product package is properly implemented and to guarantee a quick response
to market conditions.
A direct sales force is best used for the most complex sales opportunities: highly
customized solutions, large customers, and complex products. Customized solutions
and large customer accounts require professional account management, deep product
knowledge, and a high degree of selling skill—all attributes a sales representative must
possess. Also, when risk in a purchase decision is perceived as high and significant expertise is required in the sale, customers demand a high level of personal attention and
relationship building from the direct sales force as a precondition for doing business.
However, according to Lawrence Friedman and Timothy Furey, “in the broad middle
market and small-customer market, where transactions are generally simpler, other
channels can do a more cost-effective job—and can often reach more customers.”3
3 Lawrence G. Friedman and Timothy R. Furey, The Channel Advantage (Boston: Butterworth-Heinemann, 1999), p. 84.
284 Part IV
Formulating Business Marketing Strategy
INSIDE BUSINESS MARKETING
IBM Uses the Internet to Collaborate with Channel Partners
and Build Customer Loyalty
The Internet provides a valuable way for business
marketers to collaborate with distributors or other
resellers, sharing resources and cooperating on
electronic marketing initiatives. An excellent
example of this channel outreach program is IBM
TeamPlayers (http://www.ibm-teamplayers.com).
This program uses the Web as a communications
and information delivery tool to service the
channel members (business partners) of IBM.
IBM TeamPlayers offers channel members
customized direct-mail campaigns using mail, fax,
and e-mail to reach those customers. The Web site is
also an outlet for providing help to channel partners
in managing their customer databases, developing
Web pages, executing telemarketing campaigns, and
more, with IBM acting as a clearinghouse for other
needed resources.
The program strengthens IBM’s relationship
with its channel partners. Moreover, the initiative
allows IBM to identify and reach end users through
the partners and helps strengthen customer loyalty
to both IBM channel members and to IBM itself.
SOURCE: Barry Silverstein, Business-to-Business Internet
Marketing: Five Proven Strategies for Increasing Profits Through
Internet Direct Marketing (Gulf Breeze, Fla.: MAXIMUM Press,
1999), p. 307.
Many business marketing firms, such as Xerox, Cisco, and Dell, emphasize
e-commerce strategies. Surprisingly, many firms use their Web sites only for promotional purposes and not yet as a sales channel. E-channels can be used by business marketing firms as (1) information platforms, (2) transaction platforms, and (3) platforms for
managing customer relationships. The effect on the business increases as a firm moves
from level one to level three. E-commerce strategies are fully explored in Chapter 12.
Indirect Channels
Indirect distribution uses at least one type of intermediary, if not more. Business
marketing channels typically include fewer types of intermediaries than do consumergoods channels. Indirect distribution accounts for a large share of sales in the United
States. The Gartner Group reports that 60 percent of the U.S. Gross Domestic Product
(GDP) is sold through indirect channels.4 Manufacturers’ representatives and industrial
distributors account for most of the transactions handled in this way. Indirect distribution is generally found where (1) markets are fragmented and widely dispersed, (2) low
transaction amounts prevail, and (3) buyers typically purchase a number of items, often
different brands, in one transaction.5 For example, IBM’s massive sales organization concentrates on large corporate, government, and institutional customers. Industrial distributors effectively and efficiently serve literally thousands of other IBM customers—small
to medium-sized organizations. These channel partners assume a vital role in IBM’s
strategy on a global scale.
4 The Gartner Group, “Partnerware Reports, ‘Top 10 Tips for Managing Indirect Sales Channels’,” http://www
.businesswire.com, June 18, 2002.
5 E. Raymond Corey, Frank V. Cespedes, and V. Kasturi Rangan, Going to Market: Distribution Systems for Industrial
Products (Boston: Harvard University Press, 1989), p. 26.
Chapter 11 Managing Business Marketing Channels
FIGURE 11.2
285
TYPICAL SALES CYCLE: TASKS PERFORMED THROUGHOUT THE SALES PROCESS
Lead Generation
Triggered by a sales call, a customer’s response to direct mail,
or by a request for information through a Web site, an initial
contact with a prospect is made.
Lead Qualification
Potential customer is screened: the prospect’s need for the
product or service, buying interest, funding, and timeframe
for making the purchase.
Bid and Proposal
Preparation of bid and proposal to meet customer’s requirements (a complex task for large technical projects).
Negotiation and
Sales Closure
The negotiation of prices, terms, and conditions, followed by
agreement on a binding contract.
Fulfillment
For standardized product or service, delivery of offering to
customer. Configuration, customization, and installation for
more complex sales.
Customer Care
and Support
Post-sale problem resolution, customer guidance, and ongoing
contact to insure customer retention, loyalty, and growth.
SOURCE: Adapted from Lawrence G. Friedman, Go to Market Strategy: Advanced Techniques and Tools for Selling More
Products, to More Customers, More Profitably (Boston: Butterworth-Heinemann, 2002), pp. 234–236.
Integrated Multichannel Models6
Leading business marketing firms use multiple sales channels to serve customers in
a particular market. The goal of a multichannel model is to coordinate the activities
of many channels, such as field sales representatives, channel partners, call centers,
and the Web, to enhance the total customer experience and profitability. Consider a
typical sales cycle that includes the following tasks: lead generation, lead qualification,
negotiation and sales closure, fulfillment, and customer care and support (Figure 11.2).
In a multichannel system, different channels can perform different tasks within a single
sales transaction with a customer. For example, business marketing firms might use a
call center and direct mail to generate leads, field sales representatives to close sales,
business partners (for example, industrial distributors) to provide fulfillment (that is,
deliver or install product), and a Web site to provide postsale support.
Managing Customer Contact Points Figure 11.3 shows a particular multichannel strategy that a number of leading firms like Oracle Corporation use to reach the
vast middle market composed of many small and medium-sized businesses. First, the
channels are arranged from top to bottom in terms of their relative cost of sales (that is,
direct sales is the most expensive, whereas the Internet is the least). By shifting any
selling tasks to lower-cost channels, the business marketer can boost profit margins
and reach more customers, in more markets, more efficiently.
6 This section is based on Friedman, Go to Market, pp. 229–257.
286 Part IV
Formulating Business Marketing Strategy
MULTICHANNEL INTEGRATION MAP: SIMPLE EXAMPLE
OF HIGH-COVERAGE PARTNERING MODEL
FIGURE 11.3
Channel
$$$
Sales
task
Lead
generation
Qualification
Bid &
proposal
Negotiation/
sale closure
Fulfillment
Customer care
& support
Direct sales
channel
(field reps)
Business
partners
Telechannels
Direct mail
$
Internet
Sales Cycle
SOURCE: Lawrence G. Friedman, Go to Market Strategy: Advanced Techniques and Tools for Selling More Products, to More
Customers, More Profitably (Boston: Butterworth-Heinemann, 2002), p. 243. Copyright 2002. Reprinted with permission
from Elsevier Science.
Business Partner’s Key Role Returning to Figure 11.3, observe the central role of
business partners across the stages of the sales cycle. Low-cost, direct-to-customer
channels—like the Internet—are used to generate sales leads, which are then given
to channel partners. These partners are then expected to complete the sales cycle
but can secure assistance from Oracle’s sales representatives to provide guidance and
support (when needed) in closing the sale. By emphasizing the partner channel for
middle-market customers, Oracle can significantly increase market coverage and penetration while enjoying higher profit margins and lower selling costs. Moreover, this
allows the sales force to concentrate on large enterprise customers.
This provides just one example of how a firm can coordinate and configure sales
cycle tasks across various sales channels to create an integrated strategy for a particular market. Any firm that serves a variety of markets requires distinctly different
multichannel models to serve customers in those markets. To illustrate, a company
might serve key corporate accounts through sales representatives and the middle market through channel partners, call centers, and the Internet.
Customer Relationship Management (CRM) Systems Many business marketing firms pursue very complex market coverage strategies and use all of the alternative
paths to the market we have discussed. For example, Hewlett-Packard sells directly
through a field sales organization to large enterprises; through channel partners and
resellers to the government, education, and the midsize business market; and through
retail stores to the small business and home market. Notes Lawrence Friedman, a leading sales strategy consultant, “Add in its customer support channels, Web presence,
Chapter 11 Managing Business Marketing Channels
287
and H-P has an army of channels that it deploys to provide sales, service, and support
to its different market segments.”7 This multichannel mix features many points of
contact that H-P must manage and coordinate to ensure a “singular” customer experience across channels. CRM systems provide a valuable tool for coordinating sales
channel activities and managing crucial connections and handoffs between them (see
Chapter 4). Friedman notes:
Channel coordination used to be a difficult, messy problem involving the
tracking and frequent loss of hand-written memos, voice mails, paper lists of
sales leads, and dog-eared customer history files. CRM has ushered in a new
era of IT-driven channel coordination, enabling electronic transmission of
leads and customer histories from one channel to another, with no loss of
information or sales information falling through the cracks.8
Participants in the Business
Marketing Channel
Channel members assume a central role in the marketing strategies of business-tobusiness firms, large and small. A channel management strategy begins with an understanding of the intermediaries that may be used. Primary attention is given to
two: (1) industrial distributors and (2) manufacturers’ representatives. They handle a
sizable share of business-to-business sales made through intermediaries.
Distributors
Industrial distributors are the most pervasive and important single force in distribution channels. Distributors in the United States number more than 10,000, with sales
exceeding $50 billion. Distributors are heavily used for MRO (maintenance, repair,
and operations) supplies, with many industrial buyers reporting that they buy as much
as 75 percent of their MRO supplies from distributors. Generally, about 75 percent
of all business marketers sell some products through distributors. What accounts for
the unparalleled position of the distributor in the industrial market? What role do
distributors play in the industrial distribution process?
Distributors are generally small, independent businesses serving narrow geographic markets. Sales average almost $2 million, although some top $3 billion. Net
profits are relatively low as a percentage of sales (4 percent); return on investment averages 11 percent. The typical order is small, and the distributors sell to a multitude
of customers in many industries. The typical distributor is able to spread its costs
over a sizable group of vendors—it stocks goods from between 200 and 300 manufacturers. A sales force of outside and inside salespersons generates orders. Outside
salespersons make regular calls on customers and handle normal account servicing and
technical assistance. Inside salespersons complement these efforts, processing orders
and scheduling delivery; their primary duty is to take telephone orders. Most distributors operate from a single location, but some approach the “supermarket” status
with as many as 130 branches.
7 Ibid., p. 254.
8 Ibid., p. 253.
288 Part IV
Formulating Business Marketing Strategy
TABLE 11.1
KEY DISTRIBUTION RESPONSIBILITIES
Responsibility
Activity
Contact
Reach all customers in a de?ned territory through an outside sales
force that calls on customers or through an inside group that receives
telephone orders
Provide a local inventory and include all supporting activities: credit,
just-in-time delivery, order processing, and advice
Provide easy access to local repair facilities (unavailable from a distant
manufacturer)
Purchase material in bulk, then shape, form, or assemble to user
requirements
Product availability
Repair
Assembly and light
manufacturing
Compared with their smaller rivals, large distributors seem to have significant
advantages. Small distributors are typically unable to achieve the operating economies larger firms enjoy.9 Large firms can automate much of their operations, enabling
them to significantly reduce their sales and general administrative expenses, often to
levels approaching 10 percent of sales.
Distributor Responsibilities Table 11.1 shows industrial distributors’ primary
responsibilities. The products they sell—cutting tools, abrasives, electronic components, ball bearings, handling equipment, pipe, maintenance equipment, and hundreds
more—are generally those that buyers need quickly to avoid production disruptions.
Thus, the critical elements of the distributor’s function are to have these products
readily available and to serve as the manufacturer’s selling arm.
Distributors are full-service intermediaries; that is, they take title to the products they sell, and they perform the full range of marketing functions. Some of the
more important functions are providing credit, offering wide product assortments,
delivering goods, offering technical advice, and meeting emergency requirements.
Not only are distributors valuable to their manufacturer-suppliers but their customers generally view them favorably. Some purchasing agents view the distributor as an
extension of their “buying arms” because they provide service, technical advice, and
product application suggestions.
A Service Focus To create more value for their customers, many large distributors
have expanded their range of services. Value is delivered through various supply chain
and inventory management services, including automatic replenishment, product assembly, in-plant stores, and design services.10 The most popular services involve helping customers design, construct, and, in some cases, operate a supply network. Other
value-adding activities include partnerships in which the distributor’s field application
engineers work at a customer’s site to help select components for new product designs. To reap the profits associated with these important services, many distributors
now charge separate fees for each unique service.
9 Heidi Elliott, “Distributors, Make Way for the Little Guys,” Electronic Business Today 22 (September 1996): p. 19.
10 Jim Carbone, “Distributors See Slow Growth Ahead; Expect Electronics Distributors to Offer More Supply Chain and
Inventory Services, but Be Prepared to Pay for Them,” Purchasing 130 (May 16, 2002): p. 27.
Chapter 11 Managing Business Marketing Channels
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Classification of Distributors To select the best distributor for a particular channel, the marketing manager must understand the diversity of distributor operations.
Industrial distributors vary according to product lines and user markets. Firms may
be ultraspecialized (for example, selling only to municipal water works), or they may
carry a broad line of generalized industrial products. However, three primary distributor classifications are usually recognized.
1. General-line distributors cater to a broad array of industrial needs. They
stock an extensive variety of products and could be likened to the supermarket
in consumer-goods markets.
2. Specialists focus on one line or on a few related lines. Such a distributor may
handle only power transmission equipment—belts, pulleys, and bearings. The
most common specialty is fasteners, although specialization also occurs in
cutting tools, power transmission equipment, pipes, valves, and fittings. There
is a trend toward increased specialization as a result of increasing technical
complexity of products and the need for higher levels of precision and quality
control.
3. A combination house operates in two markets: industrial and consumer. Such
a distributor might carry electric motors for industrial customers and hardware
and automotive parts to be sold through retailers to final consumers.
Choosing a Distributor The selection of a distributor depends on the manufacturer’s requirements and the needs of target customer segments. The general-line
distributor offers the advantage of one-stop purchasing. If customers do not need a
high level of service and technical expertise, the general-line distributor is a good
choice. The specialist, on the other hand, provides the manufacturer with a high level
of technical capability and a well-developed understanding of complex customer requirements. Specialists handle fasteners, for instance, because of the strict qualitycontrol standards that users impose.
Manufacturers and their distributors are finding the Internet to be a major catalyst
for stimulating collaboration. A recent poll asked distributors which business strategies
would have the largest effect on them in the future, and the top two were collaboration with supply chain partners and new information technologies.11 E-collaboration
includes sales and services, ordering and billing, technical training and engineering, Internet meetings, auctions, and exchanges. These results suggest that Internet
collaboration is a critical strategic force in the business-to-business arena.
The Distributor as a Valuable Partner The quality of a firm’s distributors is often the difference between a highly successful marketing strategy and an ineffective
one. Customers prize good distributors, making it all the more necessary to strive
continually to engage the best in any given market. Distributors often provide the
only economically feasible way of covering the entire market.
In summary, the industrial distributor is a full-service intermediary who takes title
to the products sold; maintains inventories; provides credit, delivery, wide product assortment, and technical assistance; and may even do light assembly and manufacturing. Although the distributor is primarily responsible for contacting and supplying
11 Al Tuttle, “E-Collaboration: Build Trust and Success,” Industrial Distribution 92 ( June 1, 2002): p. 59.
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present customers, industrial distributors also solicit new accounts and work to expand the market. They generally handle established products—typically used in manufacturing operations, repair, and maintenance—with a broad and large demand.
Industrial distributors are a powerful force in business marketing channels, and
all indications point to an expanded role for them. The manufacturer’s representative
is an equally viable force in the business marketing channel.
Manufacturers’ Representatives
For many business marketers who need a strong selling job with a technically complex product, manufacturers’ representatives, or reps, are the only cost-effective
answer. In fact, Erin Anderson and Bob Trinkle note that the one area untouched by
the outsourcing boom is field selling in the business-to-business area. They contend
that many companies could benefit by using outsourced sales professionals, namely
manufacturers’ reps, to augment or even replace the field sales force.12 Reps are salespeople who work independently (or for a rep company), represent several companies
in the same geographic area, and sell noncompeting but complementary products.
The Rep’s Responsibilities A rep neither takes title to nor holds inventory of the products handled. (Some reps do, however, keep a limited inventory of repair and maintenance
parts.) The rep’s forte is expert product knowledge coupled with a keen understanding of
the markets and customer needs. Reps are usually limited to defined geographical areas;
thus, a manufacturer seeking nationwide distribution usually works with several rep companies. Compared with a distributor channel, a rep generally gives the business marketer
more control because the firm maintains title and possession of the goods.
The Rep-Customer Relationship Reps are the manufacturers’ selling arm, making
contact with customers, writing and following up on orders, and linking the manufacturer
with the industrial end users. Although paid by the manufacturer, the rep is also important to customers. Often, the efforts of a rep during a customer emergency (for example,
an equipment failure) mean the difference between continuing or stopping production.
Most reps are thoroughly experienced in the industries they serve—they can offer technical advice while enhancing the customer’s leverage with suppliers in securing parts, repair,
and delivery. The rep also provides customers with a continuing flow of information on
innovations and trends in equipment, as well as on the industry as a whole.
Commission Basis Reps are paid a commission on sales; the commission varies by
industry and by the nature of the selling job. Commissions typically range from a low
of 2 percent to a high of 18 percent for selected products. The average commission
rate is 5.3 percent.13 Percentage commission compensation is attractive to manufacturers because they have few fixed sales costs. Reps are paid only when they generate
orders, and commissions can be adjusted based on industry conditions. Because reps
are paid on commission, they are motivated to generate high levels of sales—another
fact the manufacturer appreciates.
12 Erin A. Anderson and Bob Trinkle, Outsourcing the Sales Function: The Real Cost of Field Sales (Mason, Ohio: Thomson
Higher Education, 2005); see also, Daniel H. McQuiston, “A Conceptual Model for Building and Maintaining
Relationships between Manufacturers’ Reps and Their Principals,” Industrial Marketing Management 30 (February 2001):
pp. 165–181.
13 Ibid., p. 22.
Chapter 11 Managing Business Marketing Channels
291
B2B TOP PERFORMERS
Why Intel Uses Reps
Intel has a strong corporate brand, an experienced
corporate sales force, and long-standing
relationships with broad-line distributors like
Arrow Electronics. Intel also uses manufacturers’
representatives. Why?
After purchasing a business unit from Digital
Equipment Corporation in 1998, Intel realized
that several product lines from the acquired unit
provided promising market potential, particularly
in networking and communications. Specifically,
the product lines could spur profitable growth in
embedded applications market segments, such as
medical equipment and point-of-sale terminals,
where the proper application function is based
on microprocessors and network connections.
At Intel, however, marketing managers argued
that the go-to-market strategy that has proved so
successful in the PC market would not be suitable
for original equipment manufacturers (OEMs) in
these sectors.
George Langer, Intel’s worldwide representative
program manager, explains:
There was no sales organization, few customer
relationships, and more than a few OEMs
who questioned Intel’s renewed interest
in the embedded segments. Intel did not
have existing capability to get these product
lines in front of appropriate customers. The
customer base was large and diverse. (This
was not the PC OEM customer base where
Intel had nurtured strong relationships
over time.) And, finally, the value of the
Intel brand was not clearly associated with
communications, embedded, and networking
market segments. Intel turned to outsourced
selling [that is, manufacturers’ reps].
SOURCE: Erin Anderson and Bob Trinkle, Outsourcing the Sales
Function: The Real Cost of Field Sales (Mason, Ohio: Thomson
Higher Education, 2005), pp. 74–75.
Experience Reps possess sophisticated product knowledge and typically have
extensive experience in the markets they serve. Most reps develop their field experience while working as salespersons for manufacturers. They are motivated to become
reps by the desire to be independent and to reap the substantial monetary rewards
possible on commission.
When Reps Are Used
• Large and Small Firms: Small and medium-sized firms generally have the greatest need for a rep, although many large firms—for example, Dow Chemical,
Motorola, and Intel—use them. The reason is primarily economic: Smaller
firms cannot justify the expense of maintaining their own sales forces. The rep
provides an efficient way to obtain total market coverage, with costs incurred
only as sales are made. The quality of the selling job is often very good as a
result of the rep’s prior experience and market knowledge.
• Limited Market Potential: The rep also plays a vital role when the manufacturer’s
market potential is limited. A manufacturer may use a direct sales force in heavily concentrated business markets, where the demand is sufficient to support
the expense, and use reps to cover less-dense markets. Because the rep carries
several lines, expenses can be allocated over a much larger sales volume.
• Servicing Distributors: Reps may also be employed by a firm that markets through
distributors. When a manufacturer sells through hundreds of distributors across
the United States, reps may sell to and service those distributors.
292 Part IV
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• Reducing Overhead Costs: Sometimes the commission rate paid to reps exceeds the
cost of a direct sales force, yet the supplier continues to use reps. This policy is not
as irrational as it appears. Assume, for example, that costs for a direct sales force
approximate 8 percent of sales and that a rep’s commission rate is 11 percent. Using reps in this case is often justified because of the hidden costs of a sales force.
First, the manufacturer does not provide fringe benefits or a fixed salary to reps.
Second, the costs of training a rep are usually limited to those required to provide
product information. Thus, using reps eliminates significant overhead costs.
Multiple Paths to Market A wide array of factors influences the choice of intermediaries, with the tasks they perform being of prime importance.
Different Market Segments The primary reason for using more than one type of intermediary for the same product is that different market segments require different
channel structures. Some firms use three distinct approaches. Large accounts are
called on by the firm’s own sales force, distributors handle small repeat orders, and
manufacturers’ reps develop the medium-sized firm market.
How Customers Buy Like size of accounts, differences in purchase behavior may also
dictate using more than one type of intermediary. If a firm produces a wide line of
industrial products, some may require high-caliber selling to numerous buying influences in a single buyer’s firm. When this occurs, the firm’s own sales force would
focus on the more complex buying situations, whereas the distributors would sell
standardized products from local stocks.
Channel Design
Channel design is the dynamic process of developing new channels where none
existed and modifying existing channels. The business marketer usually deals with
modification of existing channels, although new products and customer segments may
require entirely new channels. Regardless of whether the manager is dealing with a
new channel or modifying an existing one, channel design is an active rather than a
passive task. Effective distribution channels do not simply evolve; they are developed
by management, which takes action on the basis of a well-conceived plan that reflects
overall marketing goals. Business firms formulate their marketing strategies to appeal
to selected market segments, to earn targeted levels of profits, to maintain or increase
sales and market share growth rates, and to achieve all this within specified resource
constraints. Each element of the marketing strategy has a specific purpose.
Channel design is best conceptualized as a series of stages that the business marketing manager must complete to be sure that all important channel dimensions have been
evaluated (Figure 11.4). The result of the process is to specify the structure that provides the highest probability of achieving the firm’s objectives.14 Note that the process
focuses on channel structure and not on channel participants. Channel structure refers
to the underlying framework: the number of channel levels, the number and types of
intermediaries, and the linkages among channel members. Selection of individual intermediaries is indeed important—it is examined later in the chapter.
14 The discussion that follows is based on V. Kasturi Rangan, Transforming Your Go-To-Market Strategy: The Three
Disciplines of Channel Management (Boston: Harvard Business Press, 2006), pp. 73–88.
Chapter 11 Managing Business Marketing Channels
FIGURE 11.4
293
THE CHANNEL DESIGN PROCESS
Step 1
End-User Focus: Define Customer Segments
Step 2
Identify and Prioritize Customers’ Channel Requirements by Segment
Step 3
Assess the Firm’s Capabilities to Meet Customers’ Requirements
Step 4
Benchmark Channel Offerings of Key Competitors
Step 5
Create Channel Solutions to Customers’ Latent Needs
Step 6
Evaluate and Select Channel Options
SOURCE: Adapted from V. Kasturi Rangan, Transforming Your Go-To-Market Strategy: The Three Disciplines of Channel
Management (Boston: Harvard Business Press, 2006), pp. 73–94.
Step 1: Define Customer Segments
The primary goal of the distribution channel is to satisfy end-user needs, so the channel design process should begin there. Step 1 is about defining target market segments (see Chapter 5) and isolating the customer buying and usage behavior in each
segment (what they buy, how they buy, and how they put their purchases to use).
Some business marketers err by considering their channel partners as “customers
and rarely looking beyond them.” To inform the channel design process, however,
the marketing strategist should center on the importance of the product from the
customer’s perspective. V. Kasturi Rangan observes:
Producers of agricultural channels, for example, should target farmers and not
dealers. Producers of engineering plastics (pellets) for automobile bumpers, on
the other hand, should focus on the auto manufacturer and not the consumer,
because that is where the product has value in the eyes of the end user. . . . Other
features of the automobile (not bumpers) are more salient [in the choice
decision at the consumer level].15
Step 2: Customers’ Channel Needs by Segment
Identifying and prioritizing the channel function requirements for customers in each
market segment is next. This information should be elicited directly from a sample of
present or potential customers from each segment. Table 11.2 provides a representative list of channel functions that may be more or less important to customers in a particular segment. For example, large customers for information-technology products
might rank product customization, product quality assurance, and after-sales service
as their top three needs. Whereas small customers may prioritize product information,
assortment, and availability as their most important needs. The business marketing
manager should also probe customers on other issues that might provide strategy
15 Ibid., p. 76.
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TABLE 11.2
CHANNEL FUNCTIONS ALIGNED wITH CUSTOMER NEEDS
Channel Function
Customer Needs
1. Product Information
Customers seek more information for new and/or
technically complex products and those that are
characterized by a rapidly changing market environment.
Some products must be technically modified or need to
be adapted to meet the customer’s unique requirements.
Because of its importance to the customer’s operations,
product integrity and reliability might be given special
emphasis by customers.
For products that have a high unit value or those that are
used extensively, the purchase represents a sizable dollar
outlay and a significant financial decision for the customer.
A customer may require a broad range of products,
including complementary items, and assign special value
to one-stop shopping.
Some customer environments require the channel to
manage demand uncertainty and support a high level
of product availability.
Customers require a range of services from installation
and repair to maintenance and warranty.
A customer organization may require special
transportation and storage services to support its
operations and strategy.
2. Product Customization
3. Product Quality Assurance
4. Lot Size
5. Assortment
6. Availability
7. After-Sales Services
8. Logistics
SOURCE: Adapted from V. Kasturi Rangan, Melvyn A. J. Menezes, and E. B. Maier, “Channel Selection for New Industrial
Products: A Framework, Method, and Application,” Journal of Marketing 56 ( July 1992): pp. 72–74.
insights. For instance, how sensitive are customers to a two-hour versus six-hour
service response time, or how much value do they perceive in a three-year versus
one-year warranty?
Step 3: Assess the Firm’s Channel Capabilities
Once customer requirements have been isolated and prioritized, an assessment is
made of the strengths and weaknesses of the firm’s channel. The central focus is on
identifying the gaps between what customers in a segment desire and what the channel is now providing. Customers base their choice of a channel not on a single element, but on a complete bundle of benefits (that is, channel functions). To that end,
the business-to-business firm should identify particular channel functions, like aftersales support or availability, where action could be taken to enhance the customer
value proposition.
Step 4: Benchmark to Competitors
What go-to-market strategies are key competitors using? In designing a channel,
cost considerations prevent the business marketer from closing all the gaps on channel capabilities that may appear. However, a clear direction for strategy is revealed by
understanding the channel offerings of competitors. For example, an aggressive
Chapter 11 Managing Business Marketing Channels
295
competitor that goes to market with its own team of account managers and dedicated service specialists might demonstrate special strength in serving large corporate
customers. However, countless opportunities exist for smaller rivals to counter this
strategy by developing special channel offerings tailored to small and medium-sized
customers (for example, Intuit’s success in retaining its market leadership position in
small-business accounting software despite the aggressive challenge from Microsoft).
Step 5: Create Channel Solutions for Customers’ Latent Needs
Sometimes, a review of competitor offerings can alert the marketer to opportunities
for new offerings that may have special appeal to customers. “At other times, customers’ needs may be latent and unarticulated, and it is the channel steward’s responsibility
to tap into and surface those requirements.”16 Based on such an assessment, a provider
of information-technology equipment created an entirely new channel option for the
small and medium-sized customer segment. Rather than selling equipment, this new
channel takes responsibility for installing, upgrading, and maintaining the equipment at
the customers’ locations for an ongoing service fee.
Step 6: Evaluate and Select Channel Options
Channel decisions must ultimately consider the cost-benefit trade-offs and the estimated profitability that each of the viable channel options present.17 Some of the channel gaps that are uncovered in this assessment can be closed by the independent actions
and investments of the business-to-business firm (for example, adding to the service
support staff or the sales force). For the most part, however, the greatest progress will
come from the channel partners (for example, distributors or reps) working together
and discussing how channel capabilities can be aligned to customer needs. “The idea is
to enhance the value delivered to customers through collaborative action among channel partners. If the partners can agree on how to pull it off and, indeed, accomplish
their redefined tasks,”18 they will squarely respond to customer needs and advance the
performance of the channel. One important implication of the framework is that the
design of the channel must change as customer and competitor behavior changes.
Rather than a static structure, channel management is an ongoing process involving
continuous adjustments and evolution.
Crucial Points in Channel Transformation
Marketing channels are often thought of as a series of product and information flows that
originate with the business-to-business firm. In his rich and compelling perspective of the
channel design process, V. Kasturi Rangan turns this notion on its head (see Figure 11.5):
The starting point is the customer, and the customer’s demand-chain requirements. The channel is constructed to meet this core need. Roles, responsibilities, and rewards are allocated as a consequence of this need, and not the
other way around.19
16 Ibid., p. 83.
17 Arun Sharma and Anuj Mehrotra, “Choosing an Optimal Mix in Multichannel Environments,” Industrial Marketing
Management 36 (January 2007): pp. 21–28.
18 Rangan, Transforming Your Go-to-Market Strategy, p. 88.
19 Ibid., p. 91.
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FIGURE 11.5
CUSTOMERS DRIVE THE CHANNEL DESIGN PROCESS
Customer
Service
Installation
Assortment
Channel Partner
Size
Financing Guarantees Customization
Information
Channel Partner
Supplier
SOURCE: V. Kasturi Rangan, Transforming Your Go-To-Market Strategy: The Three Disciplines of Channel Management
(Boston: Harvard Business Press, 2006), p. 91.
Channel Administration
Once a particular business-to-business channel structure is chosen, channel participants must be selected, and arrangements must be made to ensure that all obligations
are assigned. Next, channel members must be motivated to perform the tasks necessary to achieve channel objectives. Third, conflict within the channel must be properly controlled. Finally, performance must be controlled and evaluated.
Selection of Channel Members
Why is the selection of channel members (specific companies, rather than type, which
is specified in the design process) part of channel management rather than an aspect
of channel design? The primary reason is that intermediary selection is an ongoing
process—some intermediaries choose to leave the channel, and the supplier terminates
others. Thus, selection of intermediaries is more or less continuous. Performance of
individual channel members must be evaluated continually. The manufacturer should
be prepared to move quickly, replacing poor performers with potentially better ones.
Including the selection process in ongoing channel management puts the process in
its proper perspective.
Securing Good Intermediaries The marketer can identify prospective channel
members through discussions with company salespeople and existing or potential
customers, or through trade sources, such as Industrial Distribution magazine or the
Verified Directory of Manufacturers’ Representatives. Once the list of potential intermediaries is reduced to a few names, the manufacturer uses the selection criteria to evaluate them. For example, the McGraw-Edison Company uses an intensive checklist
to compare prospective channel members; important criteria are market coverage,
product lines, personnel, growth, and financial standing.
The formation of the channel is not at all a one-way street. The manufacturer must
now persuade the intermediaries to become part of the channel system. Some distributors
Chapter 11 Managing Business Marketing Channels
297
evaluate potential suppliers just as rigorously as the manufacturers rate them—
using many of the same considerations. Manufacturers must often demonstrate the sales
and profit potential of their product and be willing to grant the intermediaries some territorial exclusivity. Special efforts are required to convince the very best rep in a market
to represent a particular manufacturer’s product. Those efforts must demonstrate that
the manufacturer will treat the rep organization as a partner and support it.
Motivating Channel Members
Distributors and reps are independent and profit oriented. They are oriented
toward their customers and toward whatever means are necessary to satisfy customer needs for industrial products and services. Their perceptions and outlook
may differ substantially from those of the manufacturers they represent. As a consequence, marketing strategies can fail when managers do not tailor their programs
to the capabilities and orientations of their intermediaries. To manage the business
marketing channel effectively, the marketer must understand the intermediaries’
perspective and devise ways to motivate them to perform in a way that enhances the
manufacturer’s long-term success. The manufacturer must continually seek support
from intermediaries, and the quality of that support depends on the motivational
techniques used.
A Partnership Channel member motivation begins with the understanding that the
channel relationship is a partnership. Manufacturers and intermediaries are in business
together; whatever expertise and assistance the manufacturer can provide to the intermediaries improves total channel effectiveness. One study of channel relationships
suggested that manufacturers may be able to increase the level of resources directed
to their products by developing a trusting relationship with their reps; by improving
communication through recognition programs, product training, and consultation
with the reps; and by informing the reps of plans, explicitly detailing objectives, and
providing positive feedback.20
Another study of distributor-manufacturer working partnerships recommended
similar approaches. It also suggested that manufacturers and their distributors engage
in joint annual planning that focuses on specifying the cooperative efforts each firm
requires of its partner to reach its objectives and that periodically reviews progress
toward objectives.21 The net result is trust and satisfaction with the partnership as the
relationship leads to meeting performance goals.
Dealer Advisory Councils One way to enhance the performance of all channel
members is to facilitate the sharing of information among them. Distributors or reps
may be brought together periodically with the manufacturer’s management to review
distribution policies, provide advice on marketing strategy, and supply industry intelligence.22 Intermediaries can voice their opinions on policy matters and are brought
directly into the decision-making process. Dayco Corporation uses a dealer council to
20 Erin Anderson, Leonard M. Lodish, and Barton A. Weitz, “Resource Allocation in Conventional Channels,” Journal of
Marketing Research 24 (February 1987): p. 95; see also McQuiston, “A Conceptual Model for Building and Maintaining
Relationships between Manufacturers’ Reps and Their Principals,” pp. 165–181.
21 James C. Anderson and James A. Narus, “A Model of Distribution Firm and Manufacturing Firm Working Partner-
ships,” Journal of Marketing 54 (January 1990): p. 56.
22 Doug Harper, “Councils Launch Sales Ammo,” Industrial Distribution 80 (September 1990): pp. 27–30.
298 Part IV
Formulating Business Marketing Strategy
keep abreast of distributors’ changing needs.23 One month after their meeting, council
members receive a written report of suggestions they made and of the programs to be
implemented as a result. Generally, Dayco enacts 75 percent of distributor proposals.
For dealer councils to be effective, the input of channel members must have a meaningful effect on channel policy decisions.
Margins and Commission In the final analysis, the primary motivating device is
compensation. The surest way to lose intermediary support is compensation policies that do not meet industry and competitive standards. Reps or distributors who
feel cheated on commissions or margins shift their attention to products generating
a higher profit. The manufacturer must pay the prevailing compensation rates in the
industry and must adjust the rates as conditions change.
Intermediaries’ compensation should reflect the marketing tasks they perform.
If the manufacturer seeks special attention for a new industrial product, most reps
require higher commissions. As noted earlier in the chapter, many industrial distributors charge separate fees for the value-added services they provide. For this approach
to work effectively, it is critical that the client understands the value it is receiving for
the extra charges.
Building Trust The very nature of a distribution channel—with each member
dependent on another for success—can invite conflict. Conflict can be controlled
in various ways, including channelwide committees, joint goal setting, and cooperative programs involving a number of marketing strategy elements. To compete, business marketers need to be effective at cooperating within a network of
organizations—the channel. For example, an IBM executive who led the team that
developed the first IBM PC in 1981 also drove the decision to sell it through dealers
and later through the channel. Soon after the introduction of the PC, an executive with American Express Travel Related Services approached the IBM executive
with an idea to sell the PCs directly to American Express card members. The IBM
executive refused—he wanted the channel to get the sale. As a result, IBM secured
the commitment and trust of its channel partners, setting the stage for many other
strategy initiatives.24
Successful cooperation results from relationships in which the parties have a
strong sense of communication and trust. Robert M. Morgan and Shelby D. Hunt
suggest that relationship commitment and trust develop when (1) firms offer benefits
and resources that are superior to what other partners could offer; (2) firms align
themselves with other firms that have similar corporate values; (3) firms share valuable information on expectations, markets, and performance; and (4) firms avoid taking advantage of their partners.25 By following these prescriptions, business marketers
and their channel networks can enjoy sustainable competitive advantages over their
rivals and their networks.
23 James A. Narus and James C. Anderson, “Turn Your Distributors into Partners,” Harvard Business Review
64 (March–April 1986): p. 68.
24 Jeff O’Heir, “The Advocates: They Raised Their Voices to Legitimize the Channel,” Computer Reseller News,
June 17, 2002, p. 51.
25 Robert M. Morgan and Shelby D. Hunt, “The Commitment-Trust Theory of Relationship Marketing,” Journal of
Marketing 58 (July 1994): pp. 20–38.
Chapter 11 Managing Business Marketing Channels
299
Summary
Channel strategy is an exciting and challenging aspect of business marketing. The
challenge derives from the number of alternatives available to the manufacturer in
distributing business products. The excitement results from the ever-changing nature
of markets, user needs, and competitors.
Channel strategy involves two primary management tasks: designing the overall
structure and managing the operation of the channel. Channel design includes evaluating distribution goals, activities, and potential intermediaries. Channel structure
includes the number, types, and levels of intermediaries to be used. A central challenge is determining how to create a strategy that effectively blends e-commerce with
traditional channels. Business marketing firms use multiple sales channels to serve
customers in a particular market segment: company salespersons, channel partners,
call centers, direct mail, and the Internet. The goal of a multichannel strategy is to
coordinate activities across those channels to enhance the customer’s experience while
advancing the firm’s performance.
The primary participants in business marketing channels are distributors and
reps. Distributors provide the full range of marketing services for their suppliers,
although customer contact and product availability are their most essential functions. Manufacturers’ representatives specialize in selling, providing their suppliers with quality representation and with extensive product and market knowledge.
The rep is not involved with physical distribution, leaving that burden to the
manufacturers.
The central objective of channel management is to enhance the value delivered
to customers through the carefully orchestrated activities of channel partners. The
channel design process hinges on deep knowledge of customer needs, and the channel
structure must be adjusted as customer or competitor behavior changes. Selection and
motivation of channel partners are two management tasks vital to channel success.
The business marketing manager may need to apply interorganizational management
techniques to resolve channel conflict. Conflict can be controlled through a variety
of means, including channelwide committees, joint goal setting, and cooperative programs that demonstrate trust and commitment.
Discussion Questions
1.
Describe the specific tasks in the typical sales cycle and discuss how
different channels (for example, business partners versus the Internet)
can perform different tasks within a single sales transaction.
2.
Using a multichannel integration map (see Figure 11.3), illustrate how
a firm might cover small and medium-sized businesses versus large
corporate customers.
3.
Explain how a direct distribution channel may be the lowest-cost
alternative for one business marketer and the highest-cost alternative for
another in the same industry.
4.
Describe specific product, market, and competitive conditions that lend
themselves to (a) a direct channel of distribution and (b) an indirect
channel of distribution.
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5. Compare and contrast the functions performed by industrial distributors
and manufacturers’ representatives.
6. What product/market factors lend themselves to the use of
manufacturers’ representatives?
7. Describe why it might be necessary for a business-to-business firm to
serve some customers through reps, some through distributors, others
exclusively online, and still others through a direct sales force.
8. Explain how a change in segmentation policy (that is, entering new
markets) may trigger the need for drastic changes in the industrial
channel of distribution.
9. Both business marketers and distributors are interested in achieving
profit goals. Why, then, are manufacturer-distributor relationships
characterized by conflict? What steps can the marketer take to reduce
conflict and thus improve channel performance?
10. For many years, critics have charged that intermediaries contribute
strongly to the rising prices of goods in the American economy. Would
business marketers improve the level of efficiency and effectiveness in
the channel by reducing as far as possible the number of intermediate
links in the channel? Support your position.
Internet Exercise
1. Sysco Corporation is a large distributor of food and food-related products to
the food-service industry. The company provides its products and services
to approximately 415,000 customers, including restaurants, health-care
and educational facilities, lodging establishments, and other food-service
customers. Although Cisco is most visible in the business press, Sysco
generates over $23 billion in sales annually and has more than 45,000
employees. Go to http://www.sysco.com and identify some of the services
Sysco provides.
CASE
SunPower’s Go-to-Market Strategy26
SunPower Corporation, a Silicon Valley–based manufacturer of solar cells and solar panels, is emerging as a potential leader in the rapidly growing, but still immature, solar industry. The firm is the leader in cell conversion efficiency, which means
that its solar cells generate more electricity at a given size than its rivals. So, when
space constraints and aesthetics are important considerations, this attribute makes
SunPower an ideal choice for business as well as home installations. To boost energy
savings, the company has also developed its own tracking systems that allow its solar
panels to follow the sun throughout the day. While costing only 5 percent more to
install, this proprietary feature allows for 30 percent more energy generation than
traditional solar systems.
SunPower serves all sectors of the business market and its customer list
includes Johnson & Johnson, FedEx, Toyota, the U.S. Postal Service, and
Microsoft. The company has signed agreements with Macy’s, Target, and WalMart to install solar systems at all of their California locations, and this may develop into a much larger opportunity, spreading to those customers’ operations
across the country.
In serving large corporate customers, like Macy’s, SunPower uses a direct
channel that controls the complete value chain from the manufacturing of the solar
panels to the installation of the system. However, the firm also sees a huge opportunity in selling its solar systems to small and medium-sized businesses (SMBs).
For smaller commercial installations (less than 500 kW of peak power), SunPower
is developing an indirect channel—a network of commercial dealers that will serve
those SMB customers. For customers in this market segment, SunPower emphasizes these benefits:
• lowering the monthly electric bills for your business;
• installing fewer panels that provide more power, thereby reducing your costs;
• taking advantage of government incentives for solar installations;
• supporting the environment and your community.
Discussion Questions
1. Channel design begins with an assessment of customer needs. What benefits or
special services should a SunPower commercial dealer provide in order to meet
the unique requirements of an SMB customer?
26 Stephen Simko, “Analyst Research: SunPower Corporation,” July 22, 2008, Morningstar, Inc., accessed at http://www
.morningstar.com on July 26, 2008.
301
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2. Describe the process that SunPower might follow to (a) evaluate potential
dealers and (b) select those that will represent them in a particular city or
geographical area.
3. To effectively implement channel strategy, what programs or strategies might
SunPower take to better prepare and equip commercial dealers to serve SMB
customers?
CHAPTER
12
E-Commerce Strategies
for Business Markets
Leading-edge firms are using the Internet to transform the way they do business.
The Internet provides a powerful platform for conveying information, conducting
transactions, delivering innovative services, and building close customer relationships. After reading this chapter, you will understand:
1. the nature of e-commerce in business markets.
2. the role of e-commerce in a firm’s marketing strategy.
3. the key issues involved in designing an e-commerce strategy.
303
304 Part IV
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Before the Internet, customers had to call Dow Chemical and request a specification
sheet for the products they were considering. The information would arrive a few days
later by mail. After choosing a product, the customer could then place an order by calling Dow (during business hours, of course). Now, though, such information is available anytime at Dow.com. In turn, a host of more personalized services are available
through MyAccount@Dow, which provides information tailored to the customer’s
requirements.1 For example, MyAccount@Dow offers secure internal monitoring of a
customer’s chemical tank levels. When tanks reach a predetermined level, reordering
can be automatically triggered. Similarly, Dell’s large-enterprise customers can use its
online resources to manage the inventory of personal computers across the organization, properly configure and upgrade them for different departments, and control the
purchase order process in line with the customer’s own budget restrictions.2
Dow Chemical and Dell represent just two of thousands of business marketers
who have integrated the Internet and electronic commerce into their corporate strategies. E-commerce not only speeds up and automates a company’s internal processes
but, just as importantly, spreads the efficiency gains to the business systems of its suppliers and customers. For example, Dell customers can shop online using their own
Enterprise Resource Planning (ERP) procurement application, route the electronic
requisition through the firm’s standard ERP workflow where it can be approved electronically, creating a purchase order that is transmitted instantly to Dell. This order
then flows directly into Dell’s manufacturing system where the equipment is built immediately and shipped, providing the customer with a timely and efficient solution.3
In other applications, e-commerce seamlessly moves data and information over
open and closed networks, bringing together previously separate groups inside the
organization and throughout the supply chain. By integrating suppliers and customers in this way, the Internet and e-commerce provide powerful tools that are ideally
suited to the business-to-business (B2B) arena.
Data on the scope and size of business-to-business transactions on the Internet
provide perspective: Compared to B2C volume, the most recent data indicate that
B2B activity—transactions by manufacturers and merchant wholesalers—accounted
for the most e-commerce (93 percent).4 Manufacturers lead all industry sectors, with
e-commerce accounting for 31.2 percent ($1,568 billion) of total shipments, and merchant wholesalers, including manufacturing sales branches and offices, ranked second,
with e-commerce accounting for 20.6 percent ($1,148 billion) of total sales.5 In contrast, retail e-commerce, the type of Internet sales with which most consumers are
familiar, totaled only $107 billion in 2006.6
As the massive growth in e-commerce continues, significant opportunities and
challenges emerge for all firms that market products and services in the business market. Witness the success of Google’s search engine. The Internet is also becoming the
main way that managers research B2B purchases.7 For example, instead of lugging
1 George S. Day and Katrina J. Bens, “Capitalizing on the Internet Opportunity,” Journal of Business & Industrial
Marketing 20 (4–5, 2005): pp. 160–168.
2Don Peppers and Martha Rogers, Return on Customer (New York: Currency–Doubleday, 2005), p. 42.
3“Dell Business to Business Ecommerce Solutions,” http://www.dell.com/content/topics/reftopic.aspx/pub/commerce, 2008.
4E-Stats: Measuring the Electronic Economy, accessed at http://www.census.gov/estats on May 16, 2008, p. 1.
5Ibid., p. 3.
6Ibid., p. 3.
7Jacob Nielsen, “B-to-B Users Want Sites with B-to-C Service, Ease,” B to B 90 (June 2005): p. 48.
Chapter 12 E-Commerce Strategies for Business Markets
305
home piles of brochures from a trade show, prospects look up potential suppliers on
the Web to learn more about their products and services. Suppliers must change their
communication strategy and develop content for the Web first, and print second—if
at all. The Web offers interaction and hypertext and a much better way to communicate complex B2B information tailored to the customer’s situation.
Firms that can enter the e-commerce marketplace by leveraging Internet capabilities with information processing, delivery capability, interorganizational collaboration, and flexibility may be able to develop important differential advantages in
selected market segments. At the same time, major challenges confront organizations
attempting to formulate an e-commerce strategy. These firms must craft a comprehensive e-commerce strategy, radically transform their traditional business models,
and deal with rapid changes in e-commerce technology.
This chapter examines the nature of e-commerce, the role it can play in the organization’s marketing strategy, the key elements in designing an e-commerce strategy,
and the future direction and potential for e-commerce in business marketing.
Defining E-Commerce8
E-commerce involves “business communications and transmissions over networks
and through computers, specifically the buying and selling of goods and services, and
the transfer of funds through digital communications.”9 Who is going to gain an advantage in the customer-empowered, competitive markets that are being reshaped by
e-commerce? A recent study suggests that firms that already excel at managing customer relationships were best equipped to capitalize on the opportunities of the Internet. According to the researchers, George S. Day and Katrina J. Bens, “Those leaders
were able to anticipate earlier how to use the Internet to connect with their customers, exploited it faster, and implemented the initiative better.” Such best-of-breed
relationship builders like Dell, Cisco Systems, FedEx, GE Healthcare, and Johnson
Controls relish the prospects presented by e-commerce.10
Alexander Ellinger and his colleagues describe the range of applications that a
successful Web site can deliver: Internet applications range from
. . . basic sites providing customers with general company information to
more complex sites where interactive applications offer customers virtual
product catalogs, opportunities to provide feedback, and an array of services including the ability to pay for and fulfi ll orders online. Successful
websites add value because of their ability to present fresh, useful, relevant,
and comprehensive information. For example, virtual product catalogs on
websites are replacing the laborious and expensive necessity of printing and
8Some authors and business marketing experts have suggested that the more appropriate term is e-business, as opposed to
e-commerce. They reason that e-commerce is a broad term that deals with all transactions that are Internet-based, whereas
e-business specifically refers to transactions and relationships between organizations. In reality, IBM is given credit for coining
the term e-business in a major 1997 advertising campaign promoting the notion of e-business. The term was new then but has
since become routinely used in the press and marketing campaigns of other companies. This chapter will use e-commerce.
9David J. Good and Roberta J. Schultz, “E-Commerce Strategies for Business-to-Business Service Firms in the Global
Environment,” American Business Review 14 (June 2002): p. 111.
10George S. Day and Katrina J. Bens, “Capitalizing on the Internet Opportunity,” p. 164; see also Chuang Ming-Ling and
Wade H. Shaw, “A Roadmap for E-Business Implementation,” Engineering Management Journal 17 (June 2005): pp. 3–13.
306 Part IV
Formulating Business Marketing Strategy
updating the physical catalogs that are customarily used in B-to-B sales.
Website content can also make information seeking more convenient for
customers. Many firms handle common information requests that would
normally require access to a service representative by posting customers’
most frequently asked questions (FAQs) and the associated answers on
their websites.
A major benefit of interactive web-based content is that it makes the
provision of customer service less expensive. For example, self-service B-to-B
website applications that allow customers automated access to the overall supply chain require fewer service personnel. Interactive web-based applications
also facilitate the customization of service and product offerings for individual
accounts, creating potential switching costs for customers and offering firms
infinite opportunities to learn more about each customer’s specific requirements and business operations.11
As this discussion suggests, e-commerce is multifaceted and complex. However, the rationale for e-commerce is easy to understand: In certain markets and for
selected customers, e-commerce can increase sales volume, lower costs, or provide
more real-time information to customers. Ravi Kalkota and Andrew Whinston effectively describe the role of e-commerce for the typical organization:
Depending on how it is applied, e-commerce has the potential to increase
revenue by creating new markets for old products, creating new informationbased products, and establishing new service delivery channels to better
serve and interact with customers. The transaction management aspect of
electronic commerce can also enable firms to reduce operating cost by
enabling better coordination in the sales, production, and distribution processes (or better supply chain management), and to consolidate operations
and reduce overhead.12
In short, e-commerce can be applied to almost all phases of business, with the
net effect of creating new demand or making most business processes more efficient.
E-commerce can be applied to procuring and purchasing products; managing the
process for fulfilling customers’ orders; providing real-time information on the
status of orders, online marketing and advertising; creating online product catalogs
and product information data sets; managing the logistics process; and processing the
payment of invoices.13 The applications are limitless, yet not all products and markets can be effectively served through the e-commerce approach. Later in the chapter
we will identify situations that offer the greatest potential for effective application of
e-commerce. The different applications of e-commerce are depicted in Figure 12.1.
Note that e-commerce can play a pivotal role across all functional areas of the business,
yet the most important application from the marketing perspective is how e-commerce
facilitates interactions with customers.
11Alexander E. Ellinger, Daniel F. Lynch, James K. Andzulis, and Ronn J. Smith, “B-to-B e-commerce: A Content
Analytical Assessment of Motor Carrier Websites,” Journal of Business Logistics 24 (2003): p. 32.
12Ravi Kalkota and Andrew B. Whinston, Electronic Commerce (Reading, MA: Addison-Wesley, 1996), p. 5.
13Ming-Ling and Shaw, “A Roadmap for E-Business,” p. 5.
Chapter 12 E-Commerce Strategies for Business Markets
FIGURE 12.1
307
TYPES OF E-COMMERCE
Interorganizational E-Commerce
1. Supplier management: helps to reduce the number of suppliers, lower procurement costs, and increase order
cycle time.
2. Inventory management: instantaneous transmission of information allows reduction of inventory; tracking of
shipments reduces errors and safety stock; out-of-stocks are reduced.
3. Distribution management: e-commerce facilitates the transmission of shipping documents and ensures the
data are accurate.
4. Channel management: rapid dissemination of information to trading partners on changing market and
customer conditions. Technical, product, and pricing information can now be posted to electronic bulletin
boards. Production information easily shared with all channel partners.
5. Payment management: payments can be sent and received electronically among suppliers and distributors,
reducing errors, time, and costs.
Intraorganizational E-Commerce
1. Workgroup communications: e-mail and electronic bulletin boards are used to facilitate internal
communications.
2. Electronic publishing: all types of company information, including price sheets, market trends, and product
specifications can be organized and disseminated instantaneously.
3. Sales force productivity: e-commerce facilitates information flow between production and the sales force and
between the sales force and the customer. Firms gain greater access to market and competitor intelligence
supplied by the sales force.
Business-to-Customer E-Commerce
1. Product information: information on new and existing products is readily available to customers on the
firm’s Web site.
2. Sales: certain products can be sold directly from the firm’s Web site, reducing the cost of the transaction
and allowing customers to have real-time information about their order.
3. Service: customers can electronically communicate about order status, product applications, problems with
products, and product returns.
4. Payment: payment can be made by the customer using electronic payment systems.
5. Marketing research: firms can use e-commerce, the Internet, and their own Web sites to gather significant
quantities of information about customers and potential customers.
Key Elements Supporting E-Commerce
Intranets and Extranets
The Internet has become an important element in the marketing strategy of many
business marketers; two other very important technological elements, however, are
integrated with an Internet strategy. Intranets are basically company-specific, internal Internets. An intranet links documents on the organization’s scattered internal
networks together. A firm’s intranet allows different functions and people to share
databases, communicate with each other, disseminate timely bulletins, view proprietary information, be trained in various aspects of the firm’s business, and share any
type of information system the company uses to manage its business. For example,
308 Part IV
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INSIDE BUSINESS MARKETING
Extending the Boundaries of E-Commerce: B2M
(Business to Machines) E-Commerce
E-commerce is multifaceted, as suggested by the
use of intranets and extranets, and the applications
are growing. A creative and relatively new
application of e-commerce—business to machine
e-commerce (B2M)—can provide huge savings.
B2M e-commerce provides data that help Ryder
negotiate with the business marketers that provide
them with parts and equipment warranties.
B2M (Business to Machines) e-Commerce is
a fast-emerging area within e-commerce. The
general idea is that companies can link to remote
machines via the Internet. As an example, consider
the $5 billion Ryder Truck Company—Ryder
System Inc. When a truck rolls into one of the
company’s maintenance bays, the attendant need
only push a button to instantly determine the status
of that vehicle. Specifically, a technician simply
touches a probe located on the end of a handheld
computer to a coin-shaped disk on the truck’s cab,
capturing information on engine performance and
fuel consumption from electronic sensors under
the hood. These sensors track information related
to 65 different aspects of the truck from oil life and
tire wear to filter life, gas mileage, and much more.
Prior to the introduction of this B2M system, the
company’s mechanics were wrong nearly 50 percent
of the time when it came to identifying problems
with the trucks. Now the sources of trouble are
identified more quickly and a truck’s downtime is
often cut in half. The company manages almost
10,000 technicians and 175,000 trucks, but
with the B2M system, inventory tracking, parts
ordering, maintenance scheduling, and personnel
scheduling are streamlined. Additionally, Ryder
uses the information it collects on engine-part
wear to negotiate longer warranties from suppliers.
According to Chief Information Officer Dennis
M. Klinger, the new system cost $33 million but
reportedly paid for itself in just a few years!
SOURCE: “The Many Flavors of E-Commerce,” Accounting
Software Advisor, http://www.accountingsoftwareadvisor.com,
accessed 2008.
Boeing, the world’s largest commercial aircraft manufacturer, maintains a company
intranet that is available to more than 200,000 Boeing employees worldwide. One
segment of its intranet contains an online course catalog for company educational
programs in supervisor training and quality control. Intranets can also incorporate
outside news. For example, Factiva, an information company, streams news into enterprise intranets. Much of the external information can be precisely tailored news,
relevant to a particular firm.14
Extranets, on the other hand, are links that allow business partners such as suppliers, distributors, and customers to connect to a company’s internal networks (intranets) over the Internet or through virtual private networks. An extranet is created
when two organizations connect their intranets for business communications and
transactions. The purpose of an extranet is to provide a communication mechanism to
streamline business processes that normally take place elsewhere. Hewlett-Packard,
for example, has established extranet links to its advertising agencies to speed the
review of ad campaigns. Business partners access a company’s intranet by means of a
unique password. Companies in the printing industry, for example, allow customers
access to their internal networks to track print jobs as they move through production
14Marydee Ojola, “Adding External Knowledge to Business Web Sites,” Online 26 (4, July–August 2002): p. 3.
Chapter 12 E-Commerce Strategies for Business Markets
309
or to browse databases of images of other media assets.15 Extranets allow a firm to
customize information and interaction with each specific customer who is granted
access to its intranet. Hewlett-Packard offers one of the largest medical sites on the
Web. To secure customized information, hospital customers have special passwords
(based on a profile they provide) that automatically connect them to “special pricing”
negotiated through that institution’s contracts with Hewlett-Packard.16
The Strategic Role of E-Commerce
For the business marketer, the crucial question is: What role does e-commerce
assume in the firm’s overall marketing strategy? One of the great dangers of
e-commerce is the potential for managers to become enamored with the technology
and ignore the strategic elements and the role of e-commerce in the firm’s overall
mission. The Internet and, more specifically, e-commerce are just instruments for
accomplishing marketing goals—the need for sound marketing strategy remains.
E-Commerce as a Strategic Component
The use of e-commerce and, more specifically, the Internet is just like any other
element the business marketer uses to accomplish the firm’s mission: It must be
focused, based on carefully crafted objectives, and directed at specific target segments.
For the marketer, the Internet can be viewed as:
1. a communication device to build customer relationships;
2. an alternative distribution channel;
3. a valuable medium for delivering services to customers;
4. a tool for gathering marketing research data;
5. a method for integrating supply chain members.
In short, the Internet usually does not replace existing distribution channels;
rather, it supports or supplements them. In a similar way, the Internet does not eliminate the selling function; rather, it facilitates the salesperson’s efforts and enhances the
effectiveness and efficiency of the sales function. Likewise, B2B e-commerce should
be viewed as an end-to-end business process, involving the entire supply chain.17
According to Hank Barnes, to be successful, business marketers must integrate
the Internet and e-commerce into the “fabric of their traditional business operations,
leveraging it as a communications tool that can increase sales, satisfaction and service levels.”18 Essentially, e-commerce extends a firm’s reach but does not change the
fundamentals of how a firm acquires, responds to, and satisfies its customers. Andy
Grove, a legendary Intel executive, aptly concludes, “Implementing the new e-commerce
model does not mean simply selling something over the Internet, but incorporating
15“Extranets Enhance Customer Relations,” Graphic Arts Monthly (January 1999): p. 89.
16Curt Werner, “Health Care E-Commerce, Still in Its Infancy, But Growing Fast,” Health Industry Today 8 (September
1998): p. 9.
17Judith Lamont, “Collaborative Commerce Revitalizes Supply Chain,” KM World 14 (July–August 2005): pp. 16–18.
18Hank Barnes, “Getting Past the Hype: Internet Opportunities for B-to-B Marketers,” Marketing News, February 1,
1999, p. 11.
310 Part IV
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INSIDE BUSINESS MARKETING
UPS Delivers the Goods Using Sophisticated
E-Commerce Technology
UPS (United Parcel Service Inc.) is an express carrier,
package delivery company, and a global provider of
specialized transportation and logistic services. Over
more than 90 years, the firm has expanded from a
small regional parcel delivery service into a global
company. The company’s primary business is the
time-definite delivery of packages and documents
throughout the United States and more than 200
other countries and territories. UPS is a leading
adopter of e-commerce applications, offering new
services like UPS online tools and many other service
applications to customers through its logistics group
at http://www.e-logistics.ups.com and at http://www
.upslogistics.com.
As the Internet was taking shape, UPS made a
financial commitment to transform its operations
to meet the changing needs of the digital economy
by establishing electronic connectivity with its
extensive base of customers. UPS is responding to
the challenge of meeting these changing needs as
the e-business evolution continues to unfold. The
company has a variety of business solutions that
give customers productive ways to manage, grow,
and even transform their businesses to stay on
course in a fast-changing, competitive market.
UPS uses a carefully crafted e-commerce
strategy to deliver the goods quickly, reliably, and
securely. Customers can obtain accurate account
and shipping information in real time. Consistently
meeting or exceeding service expectations enhances
customer satisfaction and loyalty. Every day, UPS
links 1.8 million sellers to 7 million buyers all
over the world and delivers $1.5 billion worth of
packages, including more than 55 percent of all the
goods ordered online. The company has formed
alliances with the leading e-commerce software
providers and helps customers build or improve
their Web sites so they, in turn, can better serve
their customers. UPS e-Logistics, a subsidiary of
UPS, provides integrated, end-to-end supply-chain
management services to e-commerce businesses
and dot.com divisions of established companies.
Whether the customers’ orders come via Web site,
phone, mail, or other channel, UPS e-Logistics can
manage the entire fulfillment process from inventory
management to shipping—providing clients with
new capabilities for managing information, moving
inventory, and advancing customer loyalty.
SOURCE: Nabil Alghalith, “Competing with IT: The UPS
Case,” Journal of American Academy of Business 7 (September
2005): pp. 7–15.
the Net into the day-to-day functioning of the company, in particular, as a mode for
B2B transactions and for building customer relationships.”19 From the perspective of
the entire supply chain, a key issue is to include further use of e-commerce to automate and reduce the cost of transactions and to increase the quality of product data
flows throughout the supply chain.20
What the Internet Can Do
Before exploring the strategic elements of e-commerce, let’s explore the important
benefits of an effectively developed e-commerce strategy. The Internet is a powerful
tool when used properly, and the advantages are significant in terms of more effectively serving customers, communicating useful information, and lowering the cost of
doing business.
19 As quoted in David Troy, “E-Commerce: Foundations of Business Strategy,” Caliber Learning Systems,
http://www.caliber.com.
20Aislinn McCormick, “Meeting Global Supply Demands,” Bookseller, September 16, 2005, pp. 12–13.
Chapter 12 E-Commerce Strategies for Business Markets
311
The Internet: Strategy Still Matters21
As an important new technology, many executives, entrepreneurs, and investors assumed that the Internet would change everything and render many of the old rules
about competition obsolete. Michael Porter, the noted strategist, argues persuasively
that the old rules still apply and the fundamentals of strategy remain unchanged. Indeed, caught up in the excitement over Internet technology, many firms—dot-coms
and established firms alike—made bad decisions. For example, some firms have shifted
the basis of competition toward price and away from traditional factors like quality,
features, and service. Under such conditions, all competitors in an industry struggle
to turn a profit. Alternatively, other firms forfeited important proprietary advantages
by rushing into misguided partnerships and outsourcing relationships.
The lesson for business marketers is that the Internet is an enabling technology—
a powerful set of tools that complements, rather than replaces, traditional ways of competing. So, the key decision is not whether to use Internet technology, but rather how
to deploy it. Successful companies integrate Internet initiatives directly into established
operations rather than setting these strategies apart in a specialized e-commerce unit.
Michael Porter provides this incisive forecast:
Basic Internet applications will become table stakes—companies will not be
able to survive without them, but they will not gain any advantage from them.
The more robust competitive advantages will arise from traditional strengths
such as unique products, proprietary content, distinctive physical activities,
superior product knowledge, and strong service and relationships. . . . Ultimately, strategies that integrate the Internet and traditional competitive advantages and ways of competing should win in many industries.22
Enhanced Customer Focus, Responsiveness, and Relationships The Internet
allows business marketers to align with their customers on order management and
also on product configuration and design, resulting in better customer service and
more satisfied customers. Because the Internet creates direct links between customers
and factories, corporate buyers can tailor products to meet their exact requirements.
Many business marketers now encourage customers to customize products exactly to
their specifications right on the Web site.
Reduced Transaction Costs When customers use the Internet to communicate
with suppliers, the supplier is able to provide low-cost access to both order entry and
order tracking 24 hours a day, seven days a week. Transactions that do not require inperson services can be handled in a cost-effective manner on a Web site, and the firm
can devote more staff to working with higher-margin customers requiring personal
attention. In effect, e-commerce transfers operations to “self-service,” allowing customers to download materials themselves and reducing costs for all involved. Some
companies report that by automating transactions over the Internet, the cost of a purchasing transaction has declined from $150 to $25.23
21 This section is based on Michael Porter, “Strategy and the Internet,” Harvard Business Review 79 (March 2001):
pp. 63–78.
22Ibid., p. 78.
23Dave Rumar, “Electronic Commerce Helps Cut Transaction Costs, Reduce Red Tape,” Computing Canada 25
(32, 1999): p. 24.
312 Part IV
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Integration of the Supply Chain The Internet allows companies to electronically
link far-flung constituencies, including customers, suppliers, intermediaries, and alliance partners, in spite of organizational, geographical, and functional boundaries.
All the supply chain participants can be linked by a common database that is shared
over the Internet, making the entire value-adding process seamless and more efficient. The key to effective supply chain operations is the sharing of vital information: sales forecasts, production plans, delivery schedules, tracking of finished product
shipments through the distribution network, inventory levels at various points in the
supply chain, final sales versus planned sales, and the like.
QAD, Inc., is the developer of Total eCommerce Solution, which provides a menu
of software and services that help companies more consistently integrate global partners into their back-end systems. The Total eCommerce Solution lets users extend supply chain processes to partners, providing the ultimate in business integration. QAD’s
services include capabilities for communications, translation, application integration,
business process management, and business activity management.24
Focus on Core Business The Internet makes it easier for companies to focus on
what they do best and spin off or contract out other operations to third parties that
are tied to them through the Internet. In this way, the Internet helps companies develop a “virtual company” that contracts with other firms to perform such functions
as manufacturing to warehousing. Boeing developed its latest airplane, the Boeing
777, with a portfolio of relationships among subcontractors and lead customers that
were linked electronically.25 This approach allows Boeing to devote more assets and
human resources to the critical area of product design.
Access Global Markets E-commerce provides a powerful means for B2B firms to penetrate far-flung global markets. Using the latest in IT technology, firms can exploit and
expand their customer base all over the world by implementing order and procurement
management systems, as well as sales, marketing, and customer support functionality.26 By
relying on an e-commerce solution, there is no need to invest in a sales force or “bricksand-mortar” assets in every potential market—the Web provides the necessary coverage.
The approach requires a highly effective Internet strategy and the logistics capacity to
efficiently make products available to customers in a timely fashion. Once markets are
established through e-commerce, the sales volume in a particular geographic area may, in
fact, justify the presence of a sales force, offices, and logistics operations.
Crafting an E-Commerce Strategy
Developing a B2B strategy for e-commerce is no different from developing any other
type of marketing strategy. The process begins with an evaluation of the company’s products, customers, competitive situation, resources, and operations to better
understand how all of these elements mesh with an e-commerce strategy. Figure 12.2
provides a valuable framework that outlines important strategic and tactical questions
24Renee Boucher Ferguson, “E-com Gets Integration Help,” eWeek, September 9, 2005, pp. 25–35.
25N. Venkatraman and John C. Henderson, “Real Strategies for Virtual Organizing,” Sloan Management Review 40
(Winter 1999): p. 5.
26“E-commerce Market in Asia Still Hot after Dotcom Burst,” Xinhua, July 31, 2002, accessed at WorldSources, Inc.,
Online.
Chapter 12 E-Commerce Strategies for Business Markets
FIGURE 12.2
313
QUESTIONS TO GUIDE E-COMMERCE STRATEGY FORMULATION
1. Customers and Markets
What are we already doing on the Internet, and how do our activities align with customer needs?
How can we use the Internet to provide better customer service?
How can we use the Internet to make our sales channels more effective?
2. Competitive Threats
How might traditional competitors and e-business startups change market dynamics and take away market
share or customers?
Will failure to act now precipitate a crisis within the next two years in any of our lines of business?
Can we ignore the Internet if our competitors are using it to gain attention and pricing advantages?
3. People and Infrastructure
Do our management teams and technical staff have the skills to run an Internet business?
What will it cost to fix weaknesses—exposed by our Internet business strategy—in our processes,
infrastructure, and enterprise systems?
What are appropriate business and financial structures for managing Internet business risk?
4. Sources and Operations
Are we blinding ourselves by making assumptions based on our old way of doing business that doesn’t
fit with the Internet?
What are the Internet-relevant models that match ours, threaten us, or are suitable ways to conduct business?
How can we use the Internet to make supply chains more efficient?
How can we use the Internet to lower our operating costs? How long will it take?
SOURCE: “A CEO’s Internet Business Strategy Checklist: The Leading Questions,” Business Technology Journal—Recent Research, accessed at http://
gartner112.gartnerweb.com on April 19, 1999.
that surround e-commerce strategies. Answering these questions helps the business
marketing manager to carefully define what the firm hopes to accomplish through an
e-commerce strategy and to assess several important resource issues associated with
implementing the strategy.
Some business marketers find that e-commerce is becoming so sophisticated
and technical that they need assistance in both creating and then managing their
e-commerce efforts. As a result, many third-party companies have emerged to provide sophisticated solutions to e-commerce applications, and business marketers may
find outsourcing an effective strategy. According to Stanford University’s Global
Supply Chain Forum, companies using outsourced B2B solutions experience a return
nearly 2.5 times their annual investment.27 A recent study showed that outsourced
e-commerce strategies led to marked improvements in customer satisfaction. One
other tangible benefit of outsourcing e-commerce applications is that using a single
B2B solution helps to provide a single focused approach to e-commerce, thus helping
to integrate multidivision companies with a common e-commerce vision.
27Frank O. Smith, “Stanford Forum Unearths Big Benefits in B2B Outsourcing,” Manufacturing Business Technology 25
(December, 2007): p. 11.
314 Part IV
Formulating Business Marketing Strategy
Delineating E-Commerce Objectives
A guiding principle in formulating an Internet strategy is to understand that the
Internet and the associated technology are nothing more than tools the business marketing strategist uses in satisfying the customer at a profit: “It is not a competitive
strategy or the capability to deliver the strategy.”28 Often, there is a temptation to
think that the Internet can eliminate the need for salespeople, reduce expenditures
on trade advertising, or totally replace traditional distribution channels and marketing intermediaries. For most firms, the Internet supplements the company’s traditional
marketing strategy, making it more effective or less costly, or both.
In the channels area, for example, many companies find it beneficial to use the Web
to support their dealers’ e-business efforts by providing Web-based information to
them, offering Web co-op advertising dollars, and allowing the dealers to build a frontend site onto the company’s site.29 Moreover, firms have found that a sales force remains
vital in forging customer relationships once an Internet strategy is implemented. In fact,
the Internet can make the sales force more productive. For example, PSS WorldMedical is a huge medical products distributor with a sales force of over 700 people. The
company developed a closed Customer Link system that allows customers to order
products online. The system does not replace the sales force; rather, sales reps continue
to earn commissions on Customer Link sales from their accounts. The salespeople can
then concentrate more fully on higher-profit capital equipment sales.
Synchronizing the Web with Strategy Just as important as enhancing effectiveness and efficiency, the Internet is often used to reach an entirely new or different
target market. Many experts consider Dell the “poster child for business-to-business
e-commerce” because of its legendary success in controlling costs effectively by providing custom-designed personal computers through the Internet.30 Yet what makes
Dell a great Internet marketer is its ability to take its customer-obsessed direct-sales
practices and enhance them using the Web. Says Eryn Brown in Fortune, “There isn’t
anything the company does online that it doesn’t do in the physical world. Yet Dell
and its customers know that nothing beats the Web for taking care of the ‘annoying
stuff.’”31 Dell serves as an excellent model for any B2B marketer seeking to fully synchronize an Internet strategy with its traditional salesperson-based strategy. The key
to Dell’s success is understanding the Internet’s role and its relationship to all other
elements of the firm’s marketing strategy.
Specific Objectives of Internet Marketing Strategies
The Internet can be effective in providing information as well as in stimulating customer action. Internet marketing objectives resemble those of any type of
communication strategy in the business marketplace. The Internet can be used to focus on
cognitive objectives like stimulating awareness and knowledge of the company, creating a
favorable attitude toward the firm, or stimulating the buyer to purchase. Note the Web
site for “Custom-Printed Post-it Notes” displayed in Figure 12.3. In this case, 3M allows
the customer to use its Web site to create the exact personalized Post-it note desired.
This site also illustrates how easy it is for customers to customize the product to their
28Day and Bens, “Capitalizing on the Internet Opportunity,” p. 167.
29Ginger Conlon, “Direct Impact,” Sales & Marketing Management 151 (December 1999): p. 57.
30Eryn Brown, “Nine Ways to Win on the Web,” Fortune, May 17, 1999, p. 114.
31Ibid., p. 114.
Chapter 12 E-Commerce Strategies for Business Markets
FIGURE 12.3
315
3M’S WEB SITE MAKES IT EASY TO PERSONALIZE POST-IT NOTES
SOURCE: Accessed at http://promote.3m.com/index.jsp;jsessionid=akURBYBb9vN8 on August 8, 2008, Courtesy of 3M.
Copyright © 2006 3M; all rights reserved.
requirements and place an order online to create the product. By visiting http://
promote.3m.com/index.jsp;jsessionid=akURBYBb9vN8, you can experience firsthand
how easy it is to use this online service. The following are some of the most common objectives that business marketers may have for the e-commerce portion of their business:32
1. Target a specific market or group of customers.
2. Build recognition of the company name and brands.
3. Convey a cutting-edge image.
4. Conduct market research.
5. Interact with existing customers and cultivate new ones.
6. Provide real-time information on products, services, and company finances to
customers and supply chain partners.
32Adapted from Neal J. Hannon, The Business of the Internet (Cambridge, MA: International Thomson Publishing
Company, 1998), p. 210.
316 Part IV
Formulating Business Marketing Strategy
B2B TOP PERFORMERS
GE Healthcare: Using the Web to Create New Services
GE Healthcare discovered a way to use the Web
to capture data from its medical equipment and
create valuable new services for its customers.
The resulting service application, called eCenter,
monitors and transmits patient data from MRI
machines and other GE medical equipment
directly to the radiologist (the customer). In
addition to enhancing a patient’s care, GE can also
provide valuable information that can enhance the
productivity of a health-care organization. GE can
analyze the data from one customer and compare it
to that of other customer sites to see how productive
a specific radiology department is compared with
others that use the same equipment.
Building on the success of this initiative, GE
has developed similar eCenter applications for
other GE divisions. To illustrate, GE Power
Systems customers, such as utilities, can analyze
the performance of their turbines versus others in
the industry. By viewing information technology
as a strategic capability rather than a support
function, GE is enhancing its products and cocreating new value with customers.
SOURCE: C. K. Prahalad and Venkat Ramaswamy, The Future
of Competition: Co-Creating New Value with Customers (Boston:
Harvard Business School Press, 2004), p. 223.
7. Sell products and services.
8. Sell in a more efficient manner.
9. Advertise in a new medium.
10. Generate leads for the sales force.
11. Provide a medium for customer service.
12. Build strong relationships with customers.
The specific objectives for a firm’s Internet business dictate the issues it must deal
with in formulating its strategy. For example, if the objective is to create new sales
volume, critical attention must be given to creating systems for handling transactions
and providing logistical and service support. Internet strategies vary dramatically
based on the objectives.
Internet Strategy Implementation
With the Internet objectives fully delineated, the business marketer is positioned to
develop an Internet strategy. As with any marketing process, the Internet strategy
must carefully address product, promotion, channels, and pricing. Discussion of strategy implementation begins by examining the important product-related dimensions.
The Internet Product
The Internet product is a complex array of physical elements, software, hardware,
extranets, intranets, services, and information. The Web site is the major product
element in a company’s e-commerce strategy. Even though it may include other
dimensions, the heart of an e-commerce strategy is the company’s Web site, for here
all interactions with the customer are most cost-effectively handled.
Chapter 12 E-Commerce Strategies for Business Markets
317
Text not available due to copyright restrictions
As indicated, a Web site has to be developed on the basis of a careful delineation
of company objectives, and it is rare that a Web site is developed on the basis of a
single objective. Thus, the design of the Web site becomes more complicated as top
management articulates additional objectives. Other obvious ingredients in the planning process are the needs of the targeted Web site visitors. A focus on both dimensions assures that both the company and the customer are accommodated.
Observe from Figure 12.4 how W. W. Grainger uses its Web site to make it
easy for customers to look for products and place an order. If the customer wants to
browse through different product lines, that can be done with a single click. For a
318 Part IV
Formulating Business Marketing Strategy
INSIDE BUSINESS MARKETING
“Borrow Best Tactics From Consumer E-Commerce
To Revamp Your B2B Site”
Stuck in a B2B rut? To boost lead generation and
e-Commerce transactions, one marketer looked at
best practices in consumer marketing. When they
retooled their site, changes included:
• Adding lots more images
• Creating unique landing pages for top brand
name searches
• Calculating shipping costs
The result is that site traffic increased 587%,
and the new lead generation feature created
millions of dollars in additional revenue. In turn,
new customer segments were identified, such
as universities and research labs. When Bob
Schneider redesigned the Web site for Ellsworth
Adhesives, an industrial adhesive and specialty
chemical distributor, his goal was to boost
e-commerce sales and lead generation for their
field sales reps. But to achieve those B2B goals,
Schneider and his team borrowed techniques
from the most successful consumer e-commerce
sites. “If you aren’t thinking B2C and are just
thinking you’re a B2B site, you’re not going to be
everything you can be. A lot of the B2B sites that
we looked at expected a lot of their users,” says
Schneider, the company’s former Webmaster who
now consults for Ellsworth Adhesives.
B2B purchasers are also consumers, who likely
have come to expect certain things from the online
shopping experience based on their personal
purchases at Amazon.com and other top consumer
sites. Keeping those shoppers in mind during the
redesign, Schneider’s team applied a consumer
focus to the site’s design, content, features, and
search engine optimization strategy.
Tactic 1. Provide full product information
and supporting documents
Tactic 2. Calculate actual shipping costs
for orders
Tactic 3. Show photographs of every
product
Tactic 4. P r o v i d e e x p e r t s t o a n s w e r
questions
Tactic 5. Create unique landing pages for
top brand name searches
Tactic 6. Use negative keywords to filter
out consumers
SOURCE: Marketing Sherpa, accessed at http://www
.marketing sherpa.com/article.php?ident=30113 on August 30, 2007.
repetitive order, the customer simply types in the product number and quantity
desired. To pick up a product immediately at a Grainger location, the customer only
needs to click on “find a branch.”
Successful Web Site Design To effectively develop a Web site, the designer needs
to think like a user—to anticipate how the customer will use the site and the features
that will make it easy to use. To use the Internet as a marketing tool, the Web site
should allow customers to easily move along the sales process, provide a quick and
easy way to find the product they desire, and determine whether the products fit their
needs. If the site can accomplish these goals, then the next function is to ease the
financial transaction. Speed, ease of use, and security are central to completing the
sales transaction and meeting the customer’s service expectations.
Internet Catalogs One of the first applications of e-commerce for many business
marketers that sell components, materials, and maintenance and operating resources
Chapter 12 E-Commerce Strategies for Business Markets
319
is to develop an electronic catalog on their Web sites. Rather than leafing through
thousands of pages, the user can define exact requirements and easily locate the appropriate item in the catalog. Moreover, the catalog can be continuously updated.
As Chapter 3 indicated, many firms have embraced e-purchasing applications. They
have found that electronic purchasing dramatically enhances the effectiveness of buyers
and reduces the time and expense they spend searching for operating resources or nonproduction goods. Firms without Internet catalogs will probably be unable to compete
in the future because of the great savings buyers can glean through e-purchasing.
Reverse Auctions Reverse auctions, which involve one buyer and many sellers,
have been embraced by purchasing managers across business market sectors, including government. Why? Many companies such as Quaker Oats and GlaxoSmithKline
report millions of dollars of savings with reverse auctions compared with traditional
buying methods. FreeMarkets, Inc.—now a part of Ariba—organizes reverse auctions
for manufacturers like United Technologies. Here suppliers bid on purchase contracts for component parts, raw materials, and commodities. Firms that sell commodity items face the greatest threat. Experts suggest that reverse auctions can damage
long-standing buyer-seller relationships.
Some purchasers have realized that continuously pressing for deeper price cuts
might backfire by inhibiting collaboration. If profit margins continually decline, suppliers might be forced to consolidate, thereby enhancing their power.33 Chapter 14
details particular strategies that the business marketer can implement with customers
that utilize reverse auctions.
Private Exchanges34 A new form of reverse auction has emerged—private exchanges,
which are invitation-only networks that connect a single company to its customers, suppliers, or both. Private exchanges can do what open exchanges (reverse auctions) could
not: Since they provide secure, one-on-one communication, they enhance shared supply
chain processes, such as inventory management, production planning, and order fulfillment. Some suppliers are using the process improvements generated by their participation in exchanges to build closer relationships with customers. Research suggests that
private exchanges can offer competitive advantages to most large suppliers if companies
understand what these networks offer and what they demand in return. Unlike open
B2B marketplaces and industry consortia, private exchanges keep control in the hands
of an active participant—an arrangement that helps focus activity on process rather than
price. Because suppliers on a private exchange are either invited guests or hosts, buyers
have already chosen to do business with them and often have completed price negotiations. In fact, a private exchange is chiefly an information exchange: Though buyers can
shop for a better price elsewhere, it has been shown that they are rarely inclined to do
so. Customer relationships built on trust (and supported by nondisclosure agreements)
are essential if, for example, suppliers are given access to a customer’s sales and inventory information and forecast product demand for that customer, assuring the delivery
of goods or services as needed. Private exchanges offer promise for enhancing buyersupplier relationships and for improving the efficiency of supply chains.
33 Sandy D. Jap, “An Exploratory Study of the Introduction of Online Reverse Auctions,” Journal of Marketing 67
( July 2003): pp. 96–107.
34 William Hoffman, Jennifer Keedy, and Karl Roberts, “The Unexpected Return of B2B,” The McKinsey Quarterly,
July 25, 2008, p. 1.
320 Part IV
Formulating Business Marketing Strategy
Channel Considerations with Internet Marketing
Firms that develop an Internet strategy must consider several important distribution
channel issues. An Internet marketing presence requires the manager to evaluate the
following: the effect on channel efficiencies, current marketing intermediaries, and
information sharing among channel members; the ability to rapidly deliver product;
and the need to consider the outsourcing of some key channel functions.
Channel Efficiencies One significant benefit of B2B Internet marketing is its positive impact on efficiency in the channels of distribution. The Internet uses low-cost
communications technology to automate all kinds of business transactions. As a result, much of the back-office paperwork and tasks required in dealing with channel
members that once occupied the time of several employees can now be automated. By
linking information systems with channel members through the Web, a firm helps intermediaries more effectively monitor inventory and the flow of goods through their
warehouses.
For example, a large tool distributor uses an e-commerce platform from
PartsWatch.35 The architecture enables many innovative benefits like central price updating and automatic catalog updates—without the need to send or receive disks. The
primary effect on the channel is that a company has real-time information on demand
at every level of distribution. Customers can use the system to direct and manage
the channel and efficiently provide real-time central services for all channel partners.
These types of networks allow purchase order transactions, order acknowledgments,
and shipment notices to flow seamlessly between distributors and their suppliers.
Effect on Current Intermediaries Internet strategies pose interesting questions
about the structure of a firm’s distribution channel. Depending on the nature of the
manufacturer’s Internet strategy, the role of current channel members may be expanded,
unchanged, or dramatically reduced. The key variable is how much value the channel
member adds to the process of marketing and physically distributing products. In some
instances, the channel members may be called on to serve target markets that cannot be
effectively covered through an Internet approach. Traditional channel members have
often been relegated to the role of serving very small niche markets that cannot be efficiently served through direct or Internet marketing approaches. Others have been able
to expand their role because of a manufacturer’s new Internet strategy. Because many
Internet transactions involve one or a few items, a real need exists for someone to handle the process of physically fulfilling orders, and hence a new opportunity is presented
to a distributor who can perform this function effectively.
Disintermediation Because the Internet improves connectivity among firms, it dramatically reduces the cost of communication and coordination in exchange transactions. In a networked channel, firms can bypass intermediaries who have traditionally
facilitated the flow of information and goods between firms and their customers. This
situation is referred to as disintermediation, and indications are that it is taking hold
in several B2B sectors. Large travel agencies that sell airline tickets to corporate accounts are experiencing disintermediation as airlines have created their own Web
sites that provide as much or more information to the corporate traveler as did the
35Chris Miller, “E-commerce Advances,” Aftermarket Business 115 (September 2005): p. 14.
Chapter 12 E-Commerce Strategies for Business Markets
321
agencies. Itineraries, including hotels, rental cars, and airline tickets, can be arranged
with the click of a mouse, and payment can be processed through a secure channel
right on the Web site. In fact, because of the success of these Internet strategies, the
airlines have reduced or eliminated travel agent commissions, forcing many to either
go out of business or focus on leisure travel segments.
The Internet as a Channel Alternative
The Internet can be a very effective “channel” of distribution for reaching selected
target markets. Rarely do business marketers rely solely on the Internet as their only
approach for contacting customers and consummating sales. Rather, the Internet is
but one channel or method for doing business with target markets. At AMP, the large
manufacturer of electronic connectors, its Internet catalog complements traditional
channels such as the sales force, distributors, and in-house customer service representatives. The catalog simply gives customers another avenue for doing business with
the company.36
In some cases, the Internet is particularly effective for “distributing” certain types
of products like software and written material. The software industry pioneered the
use of the Internet for product distribution. Computer software firms like Adobe Systems and Microsoft take advantage of the new Web distribution channels to sell and
distribute software electronically. The advantage is that companies of any size, with
very small marketing budgets, can take advantage of the Web to create and distribute
new products. Anything that can be digitized can be transmitted over the Internet,
which offers numerous advantages to marketers desiring to distribute printed materials. In short, the Internet broadens the reach of marketers, providing them with an
efficient channel to serve customers on a global scale.
Digital Channel Advantages By providing an effective mechanism for contacting
potential buyers, the Internet offers some advantages over traditional channels of distribution for business products. According to Judy Strauss and Raymond Frost, the
Internet adds value for several reasons:37
1. The contact can be customized to the buyer’s needs.
2. The Internet provides a wide range of referral sources such as Web pages,
search engines, shopping agents, newsgroups, chat rooms, and e-mail.
3. The Internet is always open for business: Buyers can contact the site 24 hours a
day, seven days a week.
Using the Internet, business marketers can create customized solutions for customers. For example, Staples (http://www.staples.com) offers customized catalogs for
its corporate clients. Such a strategy would be costly to implement through traditional channels. The Internet provides Staples with unparalleled flexibility in creating
just the type of catalog a particular organization desires. Other firms have developed
36Jim Kesseler, “Defining the Future of Business-to-Business Electronic Commerce,” Journal of Global Information
Management 6 (1, 1999): p. 43.
37Judy Strauss and Raymond Frost, Marketing on the Internet (Upper Saddle River, NJ: Prentice Hall, 1997), p. 168.
322 Part IV
Formulating Business Marketing Strategy
online stores to more efficiently reach small and medium-sized businesses that are
unprofitable for resellers. The Internet channel, if targeted properly and integrated
with traditional channel partners, can be a cost-effective approach for serving selected
business market segments.
The Effect of the Internet on Pricing Strategy
By providing buyers with easier access to information about products and suppliers,
the Internet bolsters the buyer’s bargaining power. The major impact has been to
substantially reduce the business marketer’s control over price. Says Michael Porter,
The great paradox of the Internet is that its very benefits—making information widely available; reducing the difficulty of purchasing, marketing, and
distribution; allowing buyers and sellers to find and transact business with one
another more easily—also makes it more difficult for companies to capture
these benefits as profits.38
Where sellers may have enjoyed selected geographical advantages because of the
lack of nearby competition, the Internet has opened up markets to many new suppliers, resulting in downward pressure on prices. The pressure on price is particularly
severe for any products or services that buyers perceive as “commodities.” These are
precisely the types of items for which buyers are using reverse auctions. The net effect is that business marketers of raw materials, components, and supplies that can
be priced and sold on the Internet must carefully rethink their pricing approach by
developing a more efficient way of competing on price or by creating new serviceenriched offerings that add value in the eyes of potential customers.
The Internet and Customer Communication
The Internet expands the business marketer’s communication capabilities. Providing real-time, up-to-date, low-cost information is one of the salient features of an
Internet strategy. Within seconds and with a few keystrokes, an entire database can
be corrected, updated, and appended, and the information can be shared with potential buyers all over the world. The scope of the communications capability of the
Internet is illustrated by the different phases of electronic commerce through which
companies typically move.39 At the most basic level, a firm might offer simple online
information, like their product catalog, facilitating access to information and enhancing product search capabilities. The limitation is the inability to help the user search
for information on the basis of predefined criteria—the catalog simply exists in an
electronic format. In the next phase of e-commerce, database publishing, the user is
provided with search capabilities. Using a search engine, the customer can scan
the catalog database and target particular requirements. The third phase, customer
self-service, provides customized information for specific users. Here customers can
download search-assisted catalogs and service diagnostics, along with information on
38Porter, “Strategy and the Internet,” p. 66.
39Kesseler, “Defining the Future of Business-to-Business Electronic Commerce,” p. 43; see also, D. Eric Boyd and
Robert Spekman, “Internet Usage Within B2B Relationships and Its Impact on Value Creation: A Conceptual Model
and Research Propositions,” Journal of Business-to-Business Marketing 11 (1–2, 2004): pp. 9–32.
Chapter 12 E-Commerce Strategies for Business Markets
323
price and product availability. The final, and most complex, phase of e-commerce,
transactions, provides for full transactions, from information gathering to purchase to
fulfillment to billing to secure payment, all in a single environment.
These categories of Internet communication capability match directly with a recent study of what typical engineers look for when browsing the Web. According to
a GlobalSpec Engineering Trends Survey, 91 percent of engineers use the Internet
to find components and suppliers, 87 percent use it to obtain product specifications,
72 percent use it for news and information, 68 percent use it for research, 64 percent
use it to find pricing information, and 60 percent use it to search for technical application ideas.40 As this study demonstrates, the Internet is a powerful communication tool that can deliver desired information to customers at a critical point in the
purchase decision-making process.
Meet the Customer’s Requirements Compared with traditional, paper-based approaches, each phase or level of e-commerce improves the way business marketers
interact with their customers and potential customers. Reflecting this fact is the recent move of the venerable Thomas Register to online availability only.41 The Thomas
Publishing Company will no longer print its multivolume directories—the Thomas
Register of American Manufacturers and The Thomas Register of Regional Buying Guides—
which have been staples for decades at North American industrial facilities. After
2006, Thomas—which was founded more than 100 years ago—will make these directories available exclusively online at http://www.thomasnet.com. The move to online
directories resulted from requests from customers. Increasingly, users were opting
against the print format and for the online version because the online directories offer search functionality, immediate access to vendor catalogs, direct links to vendor
Web sites, e-commerce capability, and a library of CAD drawings. ThomasNet.com
contains information on more than 650,000 manufacturers, distributors, and service
companies indexed by 67,000 product and service categories.
Of course, Internet communication often merely complements personal contact between buyers and sellers, particularly for complex, expensive products that
require customer-specific engineering and customization, extensive negotiations,
and long-term contractual arrangements. For example, Boeing’s Web site is used
more to describe the company and how it is organized, explain each of its aircraft
models, describe and explain the firm’s full range of services, and outline how potential buyers can work with the company in creating a product for their specific
requirements. However, for many fi rms that market supplies, standard components, repair parts, and the like, e-commerce provides the greatest potential for
reducing transaction costs while making marketing communications more efficient
and effective.
To recap, the Internet is just one component of the business marketer’s overall
strategy: It simply extends the firm’s reach, and it must be integrated into the overarching strategy the firm uses to reach and interact with its customers. Even at Dell,
where the firm operates at the phase-four level of e-commerce—full transaction
capability—the Internet is just one approach to the marketplace. According to
Chairman Michael Dell, “We work with customers face-to-face, on the telephone,
40Greg Jarboe, “Meet The B2B Search Engines,” Search Engine Watch, September 29, 2005, p. 1.
41Sean B. Callahan, “Thomas Plans to Drop Print Directories,” B to B 90 (June 2005): p. 6.
324 Part IV
Formulating Business Marketing Strategy
or over the Internet. Depending on the customer, some or all of those techniques will
be used; they’re all intertwined.”42
The Role of the Sales Force Many firms find that the Internet simply makes sales
representatives more effective because they can concentrate on solving customer
problems and building customer relationships. The Internet streamlines the sales
process and eliminates order-processing details for customers and salespersons alike.
Although the Internet will supplant some sales that were once the province of the
sales force, Internet strategies generally support sales-force efforts. By using customer
relationship management systems (CRM) (see Chapter 4), the salesperson can customize presentations, respond to specific customer idiosyncrasies, and fend off competitive challenges. Successful companies have developed approaches for integrating
sales-force strategies with Internet strategies and for compensating salespeople so that
they support online initiatives.43
Promotion To capitalize on the investment in creating and maintaining a Web site,
promotions highlighting a site need to be run frequently and in a variety of media
to stimulate use. An 18-month analysis of small-, medium-, and large-company B2B
Web sites indicated that the number of hits is directly related to the amount of offline advertising and sales promotion.44 Advertising in trade publications and handouts
at trade shows and conferences appear to be especially effective in stimulating the use
of business Web sites. Based on the success of leading search engines like Google and
Yahoo, keyword advertising has also become a central element in the promotional
budgets of B2B firms—reaching potential customers at a critical point in the purchase
decision process. Search-engine marketing and other interactive marketing communication tools are examined in Chapter 15.
For business marketers, the Internet provides a powerful vehicle for demonstrating the value of offerings and customizing them for individual customers. Rosabeth
Moss Kanter states that e-commerce pacesetters “embrace the Internet as an opportunity for questioning their existing models and experimenting with new ways technology can improve their businesses.”45
Summary
Business marketers of all types, whether manufacturers, distributors, or service providers, are integrating the Internet and electronic communications into the core of
the business marketing strategies. E-commerce is the broad term applied to communications, business processes, and transactions that are carried out through electronic
technology—mainly the Internet. E-commerce can be applied to almost any aspect
of business to make all processes more efficient. Based on Internet technologies, an
intranet is an internal network accessible only to company employees and other authorized users. By contrast, an extranet is a private network that uses Internet-based
42Financial Times Guide to Digital Business (Autumn 1999), p. 11.
43Stewart Alsop, “E or Be Eaten,” Fortune, November 8, 1999, p. 87.
44Carol Patten, “Marketers Promote Online Traffic through Traditional Media, with a Twist,” Business Marketing 84
(August 1999): p. 40.
45Rosabeth Moss Kanter, “The Ten Deadly Mistakes of Wanna-dots,” Harvard Business Review 79 (January 2001): p. 99.
Chapter 12 E-Commerce Strategies for Business Markets
325
technology to link companies with suppliers, customers, and other partners. Extranets
allow the business marketer to customize information for a particular customer and to
seamlessly share information with that customer in a secure environment.
For business marketers, the Internet has been effective as a powerful communication medium, an alternative channel, a new venue for a host of services, a datagathering tool, and a way to integrate the supply chain. To be successful, the Internet
strategy must be carefully woven into the fabric of the firm’s overall marketing strategy. The Internet offers important benefits, including reduced transaction costs, reduced cycle time, supply chain integration, access to information, and closer customer
relationships. Given the failure of many dot-com companies, the lesson for business
marketers is that the Internet is an enabling technology—a powerful set of tools that
complements, rather than replaces, traditional ways of competing.
The e-commerce strategy must be carefully crafted, beginning with a focus
on objectives. Once a firm has established objectives, it can formulate an Internet
strategy. Included in the strategy is a consideration of the product-related dimensions of the Internet offering, the most visible of which is the firm’s Web site. Extranets, electronic catalogs, and customer information must also be integrated into
the “product.” Several fundamental channel-of-distribution issues must be evaluated,
including the effect of the Internet on present channels and channel partners, channel
efficiencies, and the Internet as a separate channel to the market. Pricing issues are
also significant, particularly in light of the effect of trading communities and auction
sites. Finally, marketing communication strategies consider the extent to which the
firm provides transactional capabilities on the Web site and how the Internet strategy
is integrated with other promotional vehicles. To an important degree, the Internet
provides a powerful medium for developing a one-to-one relationship with business
market customers.
Discussion Questions
1. How do the different definitions of e-commerce apply to the marketing
tasks of a typical business marketer?
2. Discuss how Internet buying may lower the cost of procurement for a
large company like Raytheon, the manufacturer of business aircraft.
3. What advantages do Internet marketing strategies have over traditional
strategies?
4. A large industrial distributor of power transmission equipment embarks
on a project to develop an e-commerce strategy. What lessons could
it learn from consumer marketers in the design and operation of its
Internet site?
5. The Crespy Company makes control systems that regulate large gas
turbine engines. Describe the key elements of the Internet product
Crespy might develop for its customers.
6. Find a business marketing company’s Web site and evaluate how easy
it is for a potential customer to move through the site and eventually
purchase a product.
326 Part IV
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7. What are the key challenges that electronic purchasing via electronic
catalogs pose for the typical marketer of office products?
8. Evaluate this statement: The most important determinant of the profit
potential of a digital marketplace is the power of buyers and sellers in the
particular product arena. Agree or disagree? Explain.
9. Comment on the following: Internet marketing strategies will eventually
wipe out most business-to-business intermediaries.
10. Will the Internet result in stiffer price competition in the business-tobusiness marketplace? Explain.
Internet Exercise
1. Many B2B firms use Google’s AdWords product as a component
of their integrated marketing communications strategy. Go to http://
www.google.com and describe the benefits this product might offer to
a B2B firm. Describe how Xerox Corporation might use AdWords to
reach prospective customers for its new line of network color printers.
CASE
Using the Internet at W. W. Grainger
W. W. Grainger is one of the largest B2B distributors in the world. With nearly 600
branch locations throughout North America, over 2 million customers, 1,900 customer service associates, and a robust line of 500,000 products (tools, pumps, motors,
safety and material handling products, and lighting, ventilation, and cleaning items),
Grainger is the leading industrial distributor of products that allow organizations of all
types to keep their facilities and equipment running smoothly. Grainger’s objective is
to grow by capturing market share in the highly fragmented North American facilities
maintenance market. For the longer term, the company is focused on these goals:
Accelerate sales growth and increase market share by
• capturing a greater share of the business of existing accounts;
• targeting high-potential customer segments.
Increase operating leverage through
• accelerating sales growth;
• targeting high-potential customer segments;
• reconfiguring the logistics network to improve efficiency and customer service;
• enhancing internal processes with technology.
Improve return on invested capital by
• growing those business units that earn more than the cost of capital;
• improving the profitability of business units that earn less than the cost of capital.
Its large sales force and product line allow Grainger to meet customer needs in a highly
responsive manner. From its nearly 600 branch locations, products can be delivered to
customers within hours of a call. In 2008, the company’s major strategic focus was on
offering a multichannel approach for purchasing maintenance and operating supplies.
This involved providing consistent service through its branches, service centers, and
distribution centers. Investments in sales training and a revamped logistics/distribution
network were at the heart of this effort. The company’s goal of “zero carryovers”—
meaning that all orders received by 5:00 p.m. are shipped that day—is very demanding
and provides a severe challenge to regularly achieve. Grainger was recently cited by
Industrial Distribution Magazine as “the strongest brand in the industrial distribution
industry—because customers believe Grainger can get them what they need when they
need it, you can find a Grainger catalog in virtually every purchasing agent’s office in
North America.” In 2007, Grainger was ranked 375th on the Fortune 500 list and was
included in Fortune’s list of “Most Admired Companies.”
327
328 Part IV
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Discussion Questions
1.
What role would the Internet play in Grainger’s strategy, given the firm’s past
success, the nature of its product line (rather “‘stodgy” basic industrial items), the
organization of the firm (a 500,000-item catalog, a 1,900-person sales force, and
600 branch locations), and 2 million customers? Visit http://www.grainger.com
to see the special services that Grainger offers on its Web site.
2.
By providing a very brief description of 500,000 items, a Grainger catalog is
massive—weighing several pounds. In the past, Grainger executives worried
that the catalog could get too heavy for the average person to lift and, therefore,
limited product descriptions to a couple of lines. Go to the firm’s Web site, select
a particular item, and evaluate the extensive amount of information that is now
accessible for each item on the Web.
3.
Internet sales for Grainger are the most profitable of all types of sales in its
business. In addition, Internet sales account for about 20 percent of its total
volume. Explain why Grainger would have such high volume for Internet sales
and why these sales are more profitable than those made through conventional
methods.
CHAPTER
13
Supply Chain Management
When suppliers fail to deliver products or services as promised, buyers search for a
new supplier. Organizational buyers assign great importance to supply chain processes that eliminate the uncertainty of product delivery. Supply chain management assures that product, information, service, and financial resources all flow
smoothly through the entire value-creation process. Business marketers invest
considerable financial and human resources in creating supply chains to service
the needs and special requirements of their customers. After reading this chapter,
you will understand:
1. the role of supply chain management in business marketing strategy.
2. the importance of integrating both firms and functions throughout the
entire supply chain.
3. the critical role of logistics activities in achieving supply chain
management goals.
4. the importance of achieving high levels of logistics service performance
while simultaneously controlling the cost of logistics activities.
329
330 Part IV
Formulating Business Marketing Strategy
Johnson Controls is a major supplier to the automotive industry of a variety of components, including dashboards, seats, and consoles. For Chrysler’s Jeep Liberty, for
example, Johnson Controls supplies complete cockpit modules, seating systems, overhead consoles, and several electronic components. The cockpit module alone consists
of 11 major components—from mechanical, electrical, and audio systems to the instrument panel trim. The company integrates parts from 35 suppliers, assembles the
complete cockpit, and delivers it to Chrysler as one module—all within what is called
the “204-minute broadcast window.” As soon as Chrysler notifies the company that it
has received an order for a Jeep Liberty, Johnson Controls has 204 minutes to build
and deliver that cockpit to the Chrysler plant 9 miles away with any one of 200 different color and interior combinations or options.1 The company performs that operation 900 times a day, just for that one model.
Interestingly, this choreographed supply chain sequence takes place daily at several Johnson Controls plants around the world for a number of auto manufacturers,
such as Mercedes, Buick, and Pontiac. How does Johnson Controls make this happen?
The firm applies effective supply chain management processes that include (1) integrated
computer systems that provide production schedules and demand forecasts to all supply chain members, and (2) collaborative program-management tools that allow manufacturers and suppliers to synchronize activities and respond to events in real time.
From the time a component system is engineered to when it is sold, Johnson Controls
has adopted processes that tightly connect engineering, manufacturing, procurement,
marketing, and sales. Because supply chain partners manufacture components of the
firm’s interior modules, Johnson Controls works closely with them to design the right
product, at the right cost, and deliver it at the right time.
These efforts at Johnson Controls are part of an innovative approach to tightening distribution processes, bolstering links with suppliers and customers, and integrating production and marketing that is referred to as supply chain management
(SCM). As new business strategies evolve, SCM is one of the predominant management approaches driving many organizations.2 Bill Copacino, a noted supply chain
consultant, puts the importance of SCM in focus:3
In almost every industry, supply chain management has become a much more
important strategic and competitive variable. It affects all of the shareholder
value levers—cost, customer service, asset productivity, and revenue generation. Yet we are seeing a growing gap in performance between the leading
and the average companies. The best are getting better faster than the average companies across almost every industry. For instance, Dell operates with
60 to 100 inventory turns, more than two or three times most of its competitors. So, clearly, the performance gap is widening, and we see this happening in almost every industry segment. The leading supply chain performers are
applying new technology, new innovations, and new process thinking to great
advantage. The average-performing companies and the laggards have a limited window of opportunity in which to catch up.
1 Lorie Toupin, “Needed: Suppliers Who Can Collaborate throughout the Supply Chain,” Supply Chain Automotive
Supplement to Supply Chain Management Review 6 (July–August, 2002): p. 6.
2 Peter C. Brewer and Thomas W. Speh, “Using the Balanced Scorecard to Measure Supply Chain Performance,” Journal
of Business Logistics (Spring 2000): p. 75.
3 Bill Copacino, “Supply Chain Challenges: Building Relationships,” Harvard Business Review 81 (July 2003): p. 69.
Chapter 13
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This chapter describes the nature of SCM, explains its important goals, discusses
the factors that lead to successful supply chain strategies, and demonstrates how logistics
management is a key driver of supply chain success. Once SCM has been defined, the
chapter highlights how the business marketer’s logistics processes form the core of the
SCM strategy. The logistical elements are described in terms of their interface within
the distribution channel and how they must be integrated to create desired customer service standards. The chapter then addresses the role of logistics in purchasing decisions,
the types of logistics services buyers seek, and the design of effective logistics processes.
The Concept of Supply
Chain Management
A supply chain encompasses all the activities associated with moving goods from the
raw materials stage through to the end user (for example, a personal computer buyer).
A formal definition of SCM is:
Supply chain management encompasses the planning and management of all
activities involved in sourcing and procurement, conversion, and all logistics
management activities. Central to SCM are the coordination and collaboration activities performed with channel partners, which may include suppliers,
intermediaries, third party service providers, and customers. In essence, supply chain management integrates supply and demand management within and
across companies.4
The supply chain includes a variety of firms, ranging from those that process raw
materials to make component parts to those engaged in wholesaling. Included also are
organizations engaged in transportation, warehousing, information processing, and
materials handling. The critical processes involved in SCM include the following:
1. Customer Relationship Management
2. Supplier Relationship Management
3. Customer Service Management
4. Demand Management
5. Order Fulfillment
6. Manufacturing Flow Management
7. Product Development and Commercialization
8. Returns Management5
Successful SCM coordinates and integrates these processes into a seamless level of
performance. Effective supply chain management requires the careful integration of
these processes across several different organizations in the supply chain.
4 CSCMP Definition of Supply Chain Management, accessed at http://cscmp.org/aboutcscmp/definitions/definitions.asp,
August 2008.
5 Douglas Lambert (ed.), Supply Chain Management (Sarasota, FL: Supply Chain Management Institute, 2008), p. 10.
332 Part IV
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Importantly, supply chain management can improve overall company performance in two fundamental ways: revenue enhancement and cost reduction. Supply
chain management can—and should—play an important role in each of those areas. For example, supply chain management can play a leadership role in creating a
more responsive supply chain, thereby helping the company to win more business
(and increase revenues) from customers. Similarly, supply chain management can
take the lead in applying good processes to better manage and lower costs across
the entire enterprise, not just those typically assigned to procurement, manufacturing, or logistics.6
Supply chains should be managed in an integrated manner. Integrated SCM
focuses on managing relationships, information, and material flow across organizational borders to cut costs and enhance flow. When the multicompany nature of the
supply chain focus is combined with a process-flow approach to business, the critical role that SCM assumes becomes clear. Rather than merely handling order fulfillment, SCM is instrumental in a full range of activities from product development and
new-product-launch strategies to fulfillment and recycling. To that end, SCM must
be fully integrated into business strategy and fine-tuned throughout the product’s life
cycle.7 Leading supply chain–oriented firms focus intensely on monitoring actual user
demand instead of forcing into markets products that may or may not sell quickly. In
so doing, they minimize the flow of raw materials, finished product, and packaging
materials, thereby reducing inventory costs across the entire supply chain.
Partnerships: The Critical Ingredient
Thomas Stalkamp, former CEO of Chrysler, notes that many old-line U.S. industrial
firms are hampered by the fact that the atmosphere between the parties in supply
chains is more adversarial than it needs to be. He refers to this old-line, nonintegrated
approach to business as “adversarial commerce.”8 Fueling the movement to SCM has
been the recognition by many firms that adversarial commerce is costly and limits the
ability of all supply chain members to compete in the global marketplace.
Integrating activities across the supply chain requires close working relationships.
SCM may require that all firms in the supply chain share sensitive and proprietary
information about customers, actual demand, point-of-sale transactions, and corporate strategic plans. SCM involves significant joint planning and communication;
firms often create teams of personnel that cut across functional and firm boundaries
to coordinate the movement of product to market. In other words, achieving the real
potential of SCM requires integration not only among departments within the organization but also with external partners.
A wonderful example of the effect of integration among supply chain partners
is the case of Avnet, a huge electronics distributor. Avnet developed a program to
integrate its supply chain processes with those of a major manufacturer supplier
and with the major component supplier to that manufacturer. By sharing demand and
production information, the participants raised on-time delivery from 80 percent to
6 Robert A. Rudzki, “Supply Chain Management Transformation: A Leader’s Guide,” Supply Chain Management Review
12 (March, 2008): p. 14.
7 Laura Rock Kopczak and M. Eric Johnson, “The Supply Chain Management Effect,” MIT Sloan Management Review
44 (Spring 2003): p. 28.
8 Thomas T. Stallkamp, “Ending Adversarial Commerce,” Supply Chain Management Review 9 (October 2005): pp. 46–52.
Chapter 13
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333
100 percent of all orders, increased inventory turnover by a factor of 5, and tripled
the return on materials! The collaboration of all supply chain partners is required to
achieve such performance results.
Traditional, nonintegrated approaches to managing product and information
flows are expensive and time-consuming. Such approaches often involve much higher
transportation and handling costs, and they demand considerable time from salespeople, buyers, and others in the organization. For example, material is often moved
around too much—one major computer manufacturer reported that some of the components it used had traveled 250,000 miles before they reached the ultimate buyer.
Furthermore, traditional transactions processes create excess inventory in the pipeline
leading to the customer. In the pharmaceutical industry, for example, firms that have
not adopted SCM incur higher inventory-carrying costs and provide lower levels of
customer service than their competitors.
Firms and their suppliers can create highly competitive supply chains by collaborating. Failure to collaborate can result in inefficiencies such as increases in material cost,
distortion of information as it moves through a supply chain, or slow response to product
design and development. By entering into long-term supply chain partnerships, firms can
eliminate many of these problems and ensure ongoing improvement.9 Until some type of
partnership is in place, the true benefits of supply chain integration cannot be achieved.
Dell, for example, strives to maintain long-term relationships with high-reliability suppliers, such as Sony, so that items like monitors can be shipped from the supplier (Sony’s
factory) directly to the customer. The result is that Dell is able to fulfill customer orders
in real time.10 Industry experts recognize Dell as an elite performer in SCM.11
Not only do effective supply chains conduct business as partners, they also openly
share information. Intelligence about the customer and what the customer has ordered is transmitted upstream so that every organization in the supply chain has it and
can respond accordingly. When information is made immediately available to supply chain members, Tier 1 and Tier 2 suppliers can act immediately, eliminating the
delays that created inefficiencies in the past. This allows the supply chain to reduce
inventories (safety stocks) and speed up cash flow. Figure 13.1 depicts the stages that
companies go through when forming intercompany networks. Note that in Stage 3,
the “Extended Enterprise,” companies have successfully aligned both their internal
and external processes. This is the ultimate goal of SCM.
Supply Chain Management:
A Tool for Competitive Advantage
The supply chain can be a powerful competitive weapon, as market leaders like Dell,
Grainger, and Hewlett-Packard have demonstrated. Other best-in-class supply chain
performers include Johnson Controls, Inc. ( JCI), profiled at the outset of this chapter,
and Motorola. In recognizing Johnson Controls as a world-class supply chain performer,
AMR Research observed: “JCI’s continued success proves demand-driven supply chain
9 Anupam Agrawal and Arnoud De Meyer, “Managing Value in Supply Chain—Case Studies on Alternate Structures,”
INSEAD Working Papers Collection (28, 2008): p. 1.
10 S. Chopra and J. A. Van Mieghan, “Which e-Business Is Right for Your Supply Chain?” Supply Chain Management Review
4 (July–August 2000): p. 34.
11 Thomas A. Stewart and Louise O’Brien, “Execution Without Excuses,” Harvard Business Review 83 (March 2005): p. 110.
334 Part IV
Formulating Business Marketing Strategy
FIGURE 13.1
STAGES FIRMS GO THROUGH IN ADOPTING SUPPLY CHAIN MANAGEMENT
The Supply Chain Stages
Stage 3
The Expanded
Enterprise
Stage 2
Internal Process
Integration
Stage 1
Functional
Plan
Source
Stage 0
Informal
Functional orientation
suboptimizes enterprise
performance in asset
management, cost, and
customer satisfaction.
The lack of functional
policies/processes and
basic operations
management results in
unpredictable product
quality and supply.
Make
Deliver
With alignment across
all subprocesses and
levels of management,
operations management processes are
integrated and display
world-class performance
and continuous
improvement.
There is internal and
external process
integration, allowing
each enterprise to
focus on its customers
and core competencies
and on creating value.
SOURCE: Tom Brunell, “Managing a Multicompany Supply Chain,” Supply Chain Management Review (Spring 1999): p. 49. Reprinted with
permission of Supply Chain Management Review, a Cahners publication.
can work anywhere in the supply chain, provided outside-in thinking is applied from
the customer backward into manufacturing and engineering.”12 For Motorola, incorporating supply chain management into all phases of the design, sourcing, manufacturing,
and distribution processes helped the company to enhance its market position across
sectors. Supply chain management is now recognized by Motorola’s top management as
an important source of competitive advantage and shareholder value creation.13
As a primary interface point with the customer, SCM can offer value in the form
of competitively superior delivery and value-added services, as defined by customers.
Best-in-class SCM practices provide advantages, including 10 to 30 percent higher
on-time delivery performance, a 40 to 65 percent (or 1- to 2-month) advantage in
cash-to-cash cycle time, and 50 to 80 percent less standing inventory, which all translates into 3 to 6 percent of a company’s revenue. For a $100 million company, earnings improvements of up to $6 million are achievable by thoroughly adopting SCM
practices.14 However, SCM, as a source of competitive advantage, is not simply a way
to reduce cost, but also a way to boost revenues.15
12 Tony Friscia, Kevin O’Marah, Debra Hofman, and Joe Souza, “The AMR Research Supply Chain Top 25 for 2007,”
accessed at http://www.amrresearch.com/content/ on May 31, 2007.
13 William Hoffman, “Squeezing Supply Chains,” Traffic World 127 ( July 7, 2007): p. 16.
14 Bill Faherenwald, “Supply Chain: Managing Logistics for the 21st Century,” Business Week, December 28, 1998, Special
Section, p. 3.
15 Charles Batchelor, “Moving Up the Corporate Agenda,” The Financial Times, December 1, 1998, p. 1.
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335
Supply Chain Management Goals
SCM is both a boundary- and function-spanning endeavor. The underlying premise
of SCM is that waste reduction and enhanced supply chain performance come only
with both intrafirm and interfirm functional integration, sharing, and cooperation.
Thus, each firm within the supply chain must tear down functional silos and foster
true coordination and integration of marketing, production, procurement, sales, and
logistics. Furthermore, actions, systems, and processes among all the supply chain
participants must be integrated and coordinated. Firmwide integration is a necessary,
but not sufficient, condition for achieving the full potential benefits of SCM. Integration must be taken to a higher plane so that functions and processes are coordinated
across all the organizations in the supply chain. SCM is undertaken to achieve four
major goals: waste reduction, time compression, flexible response, and unit cost reduction.16 These goals have been articulated in several contexts associated with SCM,
and they speak to the importance of both interfunctional and interfirm coordination.
Waste Reduction Firms that practice SCM seek to reduce waste by minimizing
duplication, harmonizing operations and systems, and enhancing quality. With respect to duplication, firms at all levels in the supply chain often maintain inventories.
Efficiencies can be gained for the chain as a whole if the inventories can be centralized
and maintained by just a few firms at critical points in the distribution process. With
a joint goal of reducing waste, supply chain partners can work together to modify
policies, procedures, and data-collection practices that produce or encourage waste.17
Typically, waste across the supply chain manifests itself in excess inventory. Effective ways to address this are through postponement and customization strategies,
which push the final assembly of a completed product to the last practical point in the
chain. Dell provides an excellent illustration of how to reduce waste through effective “waste” management strategies. The company’s build-to-order model produces a
computer only when there is an actual customer order. Dell works with its suppliers
to achieve a system where inventory turns are measured in hours rather than days.
Because Dell does not maintain stocks of unsold finished goods, it has no need to conduct “fire sales.” The result: Waste has been eliminated both on the component side
and on the finished-goods side.
Time Compression Another critical goal of SCM is to compress order-to-delivery
cycle time. When production and logistics processes are accomplished in less time,
everyone in the supply chain is able to operate more efficiently, and a primary result
is reduced inventories throughout the system. Time compression also enables supply
chain partners to more easily observe and understand the cumulative effect of problems that occur anywhere in the chain and respond quickly. Reduced cycle time also
speeds the cash-to-cash cycle for all chain members, enhancing cash flow and financial performance throughout the system. Time compression means that information
and products flow smoothly and quickly, thus permitting all parties to respond to
customers in a timely manner while maintaining minimal inventory. Many industrial
distributors like W.W. Grainger have designed supply chains that are able to respond
16 Brewer and Speh, “Using the Balanced Scorecard,” p. 76.
17 Kate Vitasek, Karl B. Manrodt, and Jeff Abbott, “What Makes a LEAN Supply Chain?” Supply Chain Management Review
9 (October 2005): pp. 39–45.
336 Part IV
Formulating Business Marketing Strategy
to customer orders with “same-day” delivery, allowing customers to reduce inventories and to rest assured that timely delivery support is available to solve unexpected problems.
Flexible Response The third goal of SCM is to develop flexible response throughout the supply chain. Flexible response in order handling, including how orders are
handled, product variety, order configuration, order size, and several other dimensions, means that a customer’s unique requirements can be met cost-effectively. To illustrate, a firm that responds flexibly can configure a shipment in almost any way (for
example, different pallet patterns or different product assortments) and do it quickly
without problems for the customer. Flexibility also may mean customizing products
in the warehouse to correspond to a customer’s need for unique packaging and unitization. The key to flexibility is to meet individual customer needs in a way that the
customer views as cost-effective and the supply chain views as profitable.
Unit Cost Reduction The final goal of SCM is to operate logistics in a manner
that reduces cost per unit for the end customer. Firms must determine the level of
performance the customer desires and then minimize the costs of providing that service level. The business marketer should carefully assess the balance between level of
cost and the degree of service provided. The goal is to provide an appropriate value
equation for the customer, meaning that cost in some cases is higher for meaningful
enhancements in service. Cost cutting is not an absolute, but the SCM approach is
focused on driving costs to the lowest possible level for the level of service requested.
For example, shipping product in full truckload quantities weekly is less expensive
than shipping pallet quantities every day; however, when a customer like Honda wants
daily deliveries to minimize inventories, the SCM goal is to offer daily shipments at
the lowest possible cost. SCM principles drive down costs because they focus management attention on eliminating activities that unnecessarily add cost, such as duplicate
inventories, double and triple handling of the product, unconsolidated shipments, and
uncoordinated promotions, such as special sales.
Hau Lee, an internationally recognized expert, points out that supply chain efficiency is necessary, but it is not enough to ensure that firms do better than their rivals.
Only companies that build agile, adaptable, and aligned supply chains get ahead of
the competition.18 Efficient supply chains often become uncompetitive because they
do not adapt to changes in market structures: Supply chains need to keep adapting
so they can adjust to changing customer needs. In addition, low-cost supply chains
are not always able to respond to sudden and unexpected changes in markets—like a
shift in resource availability or the effect of a natural disaster. Finally, excellent supply chain companies align the interests of all the firms in their supply chain with their
own—if any company’s interests differ from those of the other organizations in the
supply chain, its actions do not maximize the chain’s performance.
Benefits to the Final Customer
A well-managed supply chain ultimately creates tangible benefits for customers
throughout the supply chain. When the supply chain reduces waste, improves cycle
18 Hau L. Lee, “The Triple-A Supply Chain,” Harvard Business Review 82 (October 2004): pp. 102–112.
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INSIDE BUSINESS MARKETING
When the Chain Breaks
It began on a stormy evening in New Mexico in
March 2000 when a bolt of lightning hit a power
line. The temporary loss of electricity knocked
out the cooling fans in a furnace at a Philips
semiconductor plant in Albuquerque. A fire
started, but was put out by staff within minutes.
The damage seemed to be minor: eight trays
of wafers containing the miniature circuitry to
make several thousand chips for mobile phones
had been destroyed. After a good clean-up, the
company expected to resume production within
a week. That is what the plant told its two biggest
customers, Sweden’s Ericsson and Finland’s
Nokia, who were vying for leadership in the
booming mobile-handset market. Nokia’s supplychain managers had realized within two days
that there was a problem when their computer
systems showed some shipments were being held
up. Delays of a few days are not uncommon in
manufacturing and a limited number of back-up
components are usually held to cope with such
eventualities. But whereas Ericsson was content
to let the delay take its course, Nokia immediately
put the Philips plant on a watch list to be closely
monitored in case things got worse.
They did. Semiconductor fabrication plants
have to be kept spotlessly clean, but on the night
of the fire, smoke and soot had contaminated a
much larger area of the plant than had first been
thought. Production would be halted for weeks. By
the time the full extent of the disruption became
clear, Nokia had already started locking up all the
alternative sources for the chips.
That left Ericsson with a serious parts shortage.
The company, having decided some time earlier
to simplify its supply chain by single-sourcing
some of its components, including the Philips
chips, had no plan B. This severely limited its
ability to launch a new generation of handsets,
which in turn contributed to huge losses in the
Swedish company’s mobile-phone division. This
has become a classic case study for supply-chain
experts and risk consultants.
SOURCE: Adapted from “When the Chain Breaks,” The
Economist, 379 (June 17, 2006): p. 18.
Parts of this article were taken from Yossi Sheffi, The Resilient
Enterprise, (Boston: MIT Press, 2005) and Martin Christopher,
Logistics and Supply Chain Management (London: Financial Times
Prentice Hall, 2005).
time and flexible response, and minimizes costs, these benefits should flow through
to ultimate customers. Thus, a key focus of the supply chain members is monitoring how much the customer is realizing these important benefits and assessing what
may be preventing them from doing so. A supply chain’s customer can be viewed on
several dimensions, and it is important to focus on each. A producer of electronic
radio parts views the radio manufacturer as an absolutely critical customer, but the
auto manufacturer that installs the radio in a car is equally important, if not more so,
and ultimately the final buyer of the automobile must be satisfied. Thus, different
demands, desires, and idiosyncrasies of customers all along the supply chain must be
understood and managed effectively. As the Inside Business Marketing example at
the Phillips semiconductor plant suggests, uncontrollable events can create havoc in
a supply chain, and both suppliers and customers need to focus attention on creating
detailed contingency plans for overcoming unplanned disruptions.
The Financial Benefits Perspective
Innovative supply chain strategies that couple physical goods movement with financial information sharing can open the door to greater end-to-end supply chain cost
338 Part IV
Formulating Business Marketing Strategy
savings, better balance sheets, lower total costs, higher margins, and a more stable
supply chain with everyone sharing the savings.19 When supply chain partners are
achieving their goals and the benefits are flowing through to customers, supply chain
members should succeed financially. The most commonly reported benefits for firms
that adopt SCM are lower costs, higher profit margins, enhanced cash flow, revenue
growth, and a higher rate of return on assets. Because activities are harmonized and
unduplicated, the cost of transportation, order processing, order selection, warehousing, and inventory is usually reduced. A study to validate the correlation between
supply chain integration and business success shows that best-practice SCM companies have a 45 percent total supply chain cost advantage over their median supply
chain competitors.20 Cash flows are improved because the total cycle time from raw
materials to finished product is reduced. The leading firms also enjoy greater cash
flow—they have a cash-to-order cycle time exactly half that of the median company.
On the other hand, recent evidence suggests that the stock market punishes firms that
stumble in SCM. For example, one study showed that supply chain glitches can result
in an 8.6 percent drop in stock price on the day the problem is announced and up to a
20 percent decline within 6 months.21
Information and Technology Drivers
Supply chains could not function at high levels of efficiency and effectiveness
without powerful information systems. Many of the complex Internet supply
chains maintained by companies like Hewlett-Packard and Cisco could not operate at high levels without sophisticated information networks and interactive
software. The Internet—and Internet technology—is the major tool business
marketers rely on to manage their lengthy and integrated systems. In addition,
a host of software applications play a key role in helping a supply chain operate
at peak efficiency.
Supply Chain Software SCM software applications provide real-time analytical
systems that manage the flow of products and information through the supply chain
network.22 Of course, many supply chain functions are coordinated, including procurement, manufacturing, transportation, warehousing, order entry, forecasting, and
customer service. Much of the software is focused on each one of the different functional areas (for example, inventory planning or transportation scheduling). However, the trend is to move toward software solutions that integrate several or all of
these functions. The result is that firms can work with a comprehensive “supply chain
suite” of software that manages flow across the supply chain while including all of the
key functional areas. Several firms producing Enterprise Resource Planning (ERP)
software—such as SAP or Oracle—have developed applications that attempt to integrate functional areas and bridge gaps across the supply chain.
19 Aura Drakšaitė and Vytautas Snieška, “Advanced Cost Saving Strategies of Supply Chain Management in Global
Markets,” Economics and Management (2008): p. 113
20 Brad Ferguson, “Implementing Supply Chain Management,” Production and Inventory Management Journal (Second
Quarter, 2000): p. 64.
21 Robert J. Bowman, “Does Wall Street Really Care about the Supply Chain?” Global Logistics and Supply Chain Strategies
(April 2001): pp. 31–35.
22 Steven Kahl, “What’s the ‘Value’ of Supply Chain Software?” Supply Chain Management Review 3 (Winter 1999): p. 61.
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SCM software creates the ability to transmit data in real time and helps organizations transform supply chain processes into competitive advantages. Equipping
employees with portable bar code scanners that feed a centralized database, FedEx
is a best-practices leader at seamlessly integrating a variety of technologies to enhance
all processes across an extended supply chain.23 The company uses a real-time data
transmission system (via the bar code scanners used for every package) to assist in
routing, tracking, and delivering packages. The information recorded by the scanners
is transmitted to a central database and is made available to all employees and customers. Each day FedEx’s communications network processes nearly 400,000 customer
service calls and tracks the location, pickup time, and delivery time of 2.5 million
packages! FedEx is electronically linked so tightly with some customers that when the
customer receives an order, FedEx’s server is notified to print a shipping label, generate an internal request for pickup, and then download the label to the customer’s
server. The label, with all the needed customer information, is printed at the customer’s
warehouse and applied to the package just before FedEx picks it up. This tight electronic linkage adds significant efficiency to the customer’s supply chain process and
allows FedEx to deliver on its promises.24
Successfully Applying the Supply
Chain Management Approach
The nature of the firm’s supply chain efforts often depends on the nature of the demand for its products. Marshall Fisher suggests that products can be separated into
two categories: “functional” items, like paper, maintenance supplies, and office furniture, for example; or “innovative” items, like cell phones, the BlackBerry, or other
high-tech products. The importance of this distinction is that functional items require
different supply chains than do innovative products.25
Functional products typically have predictable demand patterns, whereas innovative products do not. The goal for functional products is to design a supply chain with
efficient physical distribution; that is, it minimizes logistics and inventory costs and
assures low-cost manufacturing. Here, the key information sharing takes place within
the supply chain so that all participants can effectively orchestrate manufacturing, ordering, and delivery to minimize production and inventory costs.
Innovative products, on the other hand, have less predictable demand, and the
key concern is reacting to short life cycles, avoiding shortages or excess supplies, and
taking advantage of high profits during peak demand periods. Rather than seeking
to minimize inventory, supply chain decisions center on the questions of where to
position inventory, along with production capacity, in order to hedge against uncertain demand. The critical task is to capture and distribute timely information on
23 Sandor Boyson and Thomas Corsi, “The Real-Time Supply Chain,” Supply Chain Management Review 5 (January–
February 2001): p. 48.
24 For a related discussion, see Pierre J. Richard and Timothy M. Devinney, “Modular Strategies: B2B Technology and
Architectural Knowledge,” California Management Review 47 (Summer 2005): pp. 86–113.
25 Marshall Fisher, “What Is the Right Supply Chain for Your Product?” Harvard Business Review 75 (March–April
1997): p. 106.
340 Part IV
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B2B TOP PERFORMERS
Making Supplier Relationships Work
During the past decade, Toyota and Honda have
struck remarkable partnerships with some of the
same suppliers who describe their relationships
with the Big Three U.S. automakers as adversarial.
Of the 2.1 million Toyota/Lexuses and the
1.6 million Honda/Acuras sold in North America
in 2003, Toyota manufactured 60 percent and
Honda 80 percent in North America. Moreover,
the two companies source about 70 to 80 percent
of the costs of making each automobile from North
American suppliers. Despite the odds, Toyota
and Honda have managed to replicate in an alien
Western culture the same kind of supplier webs
they developed in Japan. Consequently, they enjoy
the best supplier relations in the U.S. automobile
industry, have the fastest product development
processes, and reduce costs and improve quality
year after year. Toyota claims that over 60 percent
of its innovations come from ideas provided
by their suppliers! Hence, they understand the
importance of maintaining excellent supplier
relationships.
Both firms:
• understand how their suppliers work and
develop deep knowledge of the degree of
efficiency and effectiveness that particular
suppliers demonstrate.
• turn supplier rivalry into an opportunity
by rewarding quality, innovation, and costreduction initiatives.
• actively supervise suppliers and help them
improve their operational capabilities.
• continuously and intensively share
information with suppliers.
• conduct joint improvement activities to
advance mutual goals.
Rather than excelling on one dimension, Toyota
and Honda win by applying all of them as a system
for continuously improving supplier relationships.
SOURCE: Jeffrey K. Liker and Thomas Y. Choi, “Building Deep
Supplier Relationships,” Harvard Business Review 82 (December
2004): pp. 104–113.
customer demand to the supply chain. When designing the supply chain, firms
should concentrate on creating efficient processes for functional products and responsive processes for innovative products.
Successful Supply Chain Practices
Most successful supply chains have devised approaches for participants to work together in a partnering environment. Supply chains are not effective and, in reality,
are not supply chains when the participants are adversaries. Supply chain partnerships
form the foundation. Highly effective supply chains feature integrated operations
across supply chain participants, timely information sharing, and delivering added
value to the customer. As testimony to the importance of supply chain partnerships,
the Malcolm Baldrige National Quality Award Committee recently made “key supplier and customer partnering and communication mechanisms” a separate category
it would use to recognize the best companies in the United States.26 In considering
the economic value created across the supply chain, one expert observes, “You should
26 Jeffrey K. Liker and Thomas Y. Choi, “Building Deep Supplier Relationships,” Harvard Business Review 82 (December
2004): p. 104.
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341
go for the best return on net assets for the supply chain, and trade off costs between
income statements and balance sheets to see that everybody shares in that gain.”27 For
the supply chain partners to work as a unit, this enlightened perspective of collaboration is mandatory.
For the supply chain partnership to succeed, the partners need to clearly define
their strategic objectives, understand where their objectives converge (and perhaps
diverge), and resolve any differences.28 Because the supply chain strategy drives all the
important processes in each firm as well as those that connect the firms, managers in
both organizations must participate in key decisions and support the chosen course.
Once key participants specify and endorse supply chain strategies, performance metrics can be established to track how well the supply chain is meeting its common
goals. The metrics used to measure performance are tied to the strategy and must be
linked to the performance evaluation and reward systems for employees in each of the
participating firms. Without this step, individual managers would not be motivated to
accomplish the broad goals of the supply chain.
Logistics as the Critical Element
in Supply Chain Management
Nowhere in business marketing strategy is SCM more important than in logistics.
Logistics management is that part of supply chain management that plans,
implements, and controls the efficient, effective forward and reverse flow and
storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers’ requirements.
Logistics management activities typically include inbound and outbound
transportation management, fleet management, warehousing, materials handling, order fulfillment, logistics network design, inventory management,
supply/demand planning, and management of third-party logistics services
providers. To varying degrees, the logistics function also includes sourcing and procurement, production planning and scheduling, packaging and
assembly, and customer service. It is involved in all levels of planning and
execution—strategic, operational and tactical. Logistics management is an
integrating function, which coordinates and optimizes all logistics activities,
as well as integrates logistics activities with other functions including marketing, sales, manufacturing, finance, and information technology.29
Effective business marketing demands efficient, systematic delivery of finished
products to channel members and customers. The importance of this ability has
elevated the logistics function to a place of prominence in the marketing strategy of
many business marketers.
27 Richard H. Gamble, “Financing Supply Chains,” businessfinancemag.com (June 2002): p. 35.
28 Peter C. Brewer and Thomas W. Speh, “Adapting the Balanced Scorecard to Supply Chain Management,” Supply Chain
Management Review 5 (March–April 2001): p. 49.
29 CSCMP Definition of Logistics, accessed at http://cscmp.org/aboutcscmp/definitions/definitions.asp on August 2008.
342 Part IV
Formulating Business Marketing Strategy
FIGURE 13.2
SUPPLY CHAIN FOR ELECTRIC MOTORS
Transportation
Transportation
Iron Ore
Mining
Steel
Fabrication
Transportation
Parts
Manufacturers
Electric
Motor
Manufacturer
Transportation
Warehousing
C
U
S
T
O
M
E
R
Warehousing
DISTRIBUTOR
Transportation
Warehousing
Distinguishing Between Logistics and Supply Chain Management
Logistics is the critical element in SCM. In fact, there is considerable confusion over
the difference between the discipline of SCM and logistics. As our definition stated,
SCM is focused on the integration of all business processes that add value for customers.
The 1990s witnessed the rising importance of time-based competition, rapidly improving information technology, expanding globalization, increasing attention to quality, and the changing face of interfirm relationships. These trends combined to cause
companies to expand their perspective on logistics to include all the firms involved in
creating a finished product and delivering it to the buyer or user on time and in perfect
condition. For example, the supply chain for electric motors would include raw material
suppliers, steel fabricators, component parts manufacturers, transportation companies,
the electric motor manufacturer, the distributor of electric motors, the warehouse companies that store and ship components and finished products, and the motor’s ultimate
buyer. Figure 13.2 graphically depicts such a supply chain. The SCM concept is an
integrating philosophy for coordinating the total flow of a supply channel from supplier
to ultimate user. Logistics is critical, however, to business marketers, because regardless
of the orientation to the entire supply chain, the firm relies on its logistics system to
deliver product in a timely, low-cost manner.
Managing Flows
The significance of the supply chain perspective in logistical management is that the
business marketing manager focuses attention on the performance of all participants
in the supply chain. The manager also coordinates their efforts to enhance the timely
delivery of the finished product to the ultimate user at the lowest possible cost. Inherent in the supply chain approach is the need to form close relationships with the
supply chain participants, including vendors, transportation suppliers, warehousing
companies, and distributors. The focus of logistics in the SCM for business marketers is the flow of product through the supply chain, with timely information driving the
entire process.
Product flow in the reverse direction is also important in business supply chains.
Many companies, like Xerox and Canon, routinely remanufacture products that are
worn out or obsolete. Effective linkages and processes must be in place to return such
products to a facility in order to remanufacture or retrofit them. If the reverse supply
Chapter 13
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343
chains are operating effectively, companies can sometimes realize higher margins on
the remanufactured products than they do on new items.30
The Strategic Role of Logistics
In the past, logistics was viewed simply as a cost of doing business and a function whose
only goal was higher productivity. Today, many companies view logistics as a critical
strategic weapon because of its tremendous effect on a customer’s operation. For many
business marketers, logistics is their primary marketing tool for gaining and maintaining
competitive superiority. These firms typically recognize that logistics performance is
an important part of marketing strategy, and they exploit their logistics competencies.
Companies that incorporate logistics planning and management into long-term business strategies can achieve significant benefits, which create real value for the company.
Nucor Steel enjoys strong customer loyalty because it can deliver steel to a construction
site within a 2- to 4-hour window and offload the truck in the sequence in which the
steel beams will be used on the job! This advantage is significant because storage space
is limited at most construction sites in urban areas. This strong value-added service
allows Nucor to achieve higher levels of profitability than its competitors.
Sales-Marketing-Logistics Integration
The rising value of logistics as a strategic marketing weapon has fostered the integration of the sales, marketing, and logistics functions of many business marketers. In
progressive firms, unified teams of sales, production, logistics, information systems,
and marketing personnel develop integrated logistics programs to offer to potential
customers. Sales calls are made by teams of specialists from each area, and the teams
tailor logistics solutions to customer problems. United Stationers, one of the largest
U.S. office products distributors, brings operations and salespeople together to meet
with the company’s resellers in an effort to create customer-responsive logistics service.
As a result of its efforts, United guarantees customers that orders placed by 7:00 p.m.
will be received before noon on the following day. Customers can dial into United’s
mainframe computer and place orders electronically. The company considers all of its
logistics people to be part of the sales function. Some firms have taken the integration
even further. Baxter Healthcare warehouse workers team up with warehouse personnel at the hospitals that Baxter serves. During visits to the customer warehouse, the
Baxter warehouser evaluates the operation, looking for ways to improve packing
so shipments are easier to unload and unpack. As a result, Baxter warehousers have
become salespeople.
Just-in-Time Systems
To serve a customer, business marketers must be prepared to deliver their products
frequently and with precise timing. The reason is the widespread adoption by manufacturing firms, like Honda of America, of the just-in-time ( JIT) inventory principle.
Under this principle, suppliers carefully coordinate deliveries with the manufacturer’s
30 James Stock, Thomas W. Speh, and Herbert Shear, “Many Happy (Product) Returns,” Harvard Business Review 80
( July 2002): p. 14.
344 Part IV
Formulating Business Marketing Strategy
production schedule—often delivering products just hours before they are used. The
objective of a JIT system is to eliminate waste of all kinds from the production process
by requiring the delivery of the specified product at the precise time, and in the exact
quantity needed. Importantly, the quality must be perfect—there is no opportunity to
inspect products in the JIT process. Because JIT attempts to relate purchases to production requirements, the typical order size shrinks, and more frequent deliveries are
required. Increased delivery frequency presents a challenge to the business marketing production and logistics system. However, business marketers will have to meet
this challenge, as many competitors now compete on the basis of inventory turns and
speed to market.31
Just-in-Time Relationship A significant effect of JIT purchasing has been to drastically reduce the number of suppliers manufacturers use. Suppliers who are able to
meet customers’ JIT requirements find their share of business growing.32 Meeting
JIT requirements often represents a marketing edge and may mean survival for some
suppliers. The relationship between JIT suppliers and manufacturers is unique and
includes operational linkages that unite the buyer and seller. As a result, suppliers find
that the relationships are longer lasting and usually formalized with a written contract
that may span up to 5 years.
Elements of a Logistical System Table 13.1 presents the controllable variables
of a logistical system. Almost no decision on a particular logistical activity can be
made without evaluating its effect on other areas. The system of warehouse facilities, inventory commitments, order-processing methods, and transportation linkages
determines the supplier’s ability to provide timely product availability to customers.
As a result of poor supplier performance, customers may have to bear the extra cost
of higher inventories, institute expensive priority-order-expediting systems, develop
secondary supply sources, or, worst of all, turn to another supplier.
Total-Cost Approach
In the management of logistical activities, two performance variables must be considered: (1) total distribution costs and (2) the level of logistical service provided to
customers. The logistical system must be designed and administered to achieve that
combination of cost and service levels that yields maximum profits. Logistical costs
vary widely for business marketers, depending on the nature of the product and on
the importance of logistical service to the buyer. Logistical costs can consume 16
to 36 percent of each sales dollar at the manufacturing level, and logistical activities can consume more than 40 percent of total assets. Thus, logistics can have a
significant effect on corporate profitability. How, then, can the marketer manage
logistical costs?
The total-cost, or trade-off, approach to logistical management guarantees to
minimize total logistical costs in the firm and within the channel. The assumption is
that costs of individual logistical activities are interactive; that is, a decision about one
logistical variable affects all or some of the others. Management is thus concerned
31 Andrew Tanzer, “Warehouses That Fly,” Forbes, October 18, 1999, p. 121.
32 Peter Bradley, “Just-in-Time Works, but. . . .” Purchasing 118 (September 1995): p. 36.
Chapter 13
TABLE 13.1
Supply Chain Management
345
CONTROLLABLE ELEMENTS IN A LOGISTICS SYSTEM
Elements
Key Aspects
Customer service
The “product” of logistics activities, customer service
relates to the effectiveness in creating time and place
utility. The level of customer service provided by the
supplier has a direct impact on total cost, market share,
and profitability.
Order processing
Order processing triggers the logistics process and directs
activities necessary to deliver products to customers. Speed
and accuracy of order processing affect costs and customer
service levels.
Logistics communication
Information exchanged in the distribution process guides
the activities of the system. It is the vital link between the
firm’s logistics system and its customers.
Transportation
The physical movement of products from source of supply
through production to customers is the most significant cost
area in logistics, and it involves selecting modes and specific
carriers as well as routing.
Warehousing
Providing storage space serves as a buffer between
production and use. Warehousing may be used to enhance
service and to lower transportation costs.
Inventory control
Inventory is used to make products available to customers
and to ensure the correct mix of products is at the proper
location at the right time.
Packaging
The role of packaging is to provide protection to the
product, to maintain product identity throughout the
logistics process, and to create effective product density.
Materials handling
Materials handling increases the speed of, and reduces
the cost of, picking orders in the warehouse and moving
products between storage and the transportation
carriers. It is a cost-generating activity that must
be controlled.
Production planning
Utilized in conjunction with logistics planning, production
planning ensures that products are available for inventory in
the correct assortment and quantity.
Plant and warehouse location
Strategic placement of plants and warehouses increases
customer service and reduces the cost of transportation.
SOURCE: Adapted from James R. Stock and Douglas M. Lambert, Strategic Logistics Management, 5th ed. (Homewood,
IL: McGraw-Hill, 2000).
with the efficiency of the entire system rather than with minimizing the cost of any
single logistical activity. The interactions among logistical activities (that is, transportation, inventory, warehousing) are described as cost trade-offs because a cost increase
in one activity is traded for a large cost decrease in another activity, the net result being an overall cost reduction.
346 Part IV
Formulating Business Marketing Strategy
Calculating Logistics Costs
Activity-Based Costing
The activity-based costing (ABC) technique is used to precisely measure the costs of
performing specific activities and then trace those costs to the products, customers,
and channels that consumed the activities.33 This is a powerful tool in managing the
logistics operations of a supply chain. ABC provides a mechanism to trace the cost of
performing logistics services for the customers that use these services, making it easier
to assess the appropriate level of customer service to offer. Firms using ABC analysis
can obtain more accurate information about how a particular customer or a specific
product contributes to overall profitability.34
Total Cost of Ownership
Total cost of ownership (TCO) determines the total costs of acquiring and then
using a given item from a particular supplier (see Chapter 2). The approach identifies costs—often buried in overhead or general expenses—that relate to the costs of
holding inventory, poor quality, and delivery failure.35 A buyer using TCO explicitly
considers the costs that the supplier’s logistics system either added to, or eliminated
from, the purchase price and would take a long-term perspective in evaluating cost.36
Thus, a supplier particularly efficient at logistics might be able to reduce the buyer’s
inventory costs and the buyer’s expenses of inspecting inbound merchandise. As a result, the total cost of ownership from that supplier would be lower than the cost from
other suppliers that were not able to rapidly deliver undamaged products. Increasing
acceptance of the TCO approach will cause logistics efficiency to become an even
more critical element of a business marketer’s strategy.
Business-to-Business Logistical Service
Many studies have shown that logistics service is often just as important as product
quality as a measure of supplier performance. In many industries, a quality product
at a competitive price is a given, so customer service is the key differentiator among
competitors. In one industry, for example, purchasing agents begin the buying process
by calling suppliers with the best delivery service to see whether they are willing to
negotiate prices. Because it is so important to customers, reliable logistics service can
lead to higher market share and higher profits. A study by Bain and Company showed
that companies with superior logistics service grow 8 percent faster, collect a 7 percent
price premium, and are 12 times as profitable as firms with inferior service levels.37
33 Bernard J. LaLonde and Terrance L. Pohlen, “Issues in Supply Chain Costing,” International Journal of Logistics
Management 7 (1, 1996): p. 3.
34 Thomas A. Foster, “Time to Learn the ABCs of Logistics,” Logistics (February 1999): p. 67.
35 Lisa Ellram, “Activity-Based Costing and Total Cost of Ownership: A Critical Linkage,” Journal of Cost Management 8
(Winter 1995): p. 22.
36 Bruce Ferrin and Richard E. Plank, “Total Cost of Ownership Models: An Exploratory Study,” Journal of Supply Chain
Management 38 (Summer 2002): p. 18.
37 Mary Collins Holcomb, “Customer Service Measurement: A Methodology for Increasing Customer Value through
Utilization of the Taguchi Strategy,” Journal of Business Logistics 15 (1, 1994): p. 29.
Chapter 13
TABLE 13.2
Supply Chain Management
347
COMMON ELEMENTS OF LOGISTICS SERVICE
Elements
Description
Delivery time
The time from the creation of an order to the fulfillment
and delivery of that order encompasses both orderprocessing time and delivery or transportation time.
Delivery reliability
The most frequently used measure of logistics service,
delivery reliability focuses on the capability of having
products available to meet customer demand.
Order accuracy
The degree to which items received conform to the
specification of the order. The key dimension is the
incidence of orders shipped complete and without error.
Information access
The firm’s ability to respond to inquiries about order status
and product availability.
Damage
A measure of the physical conditions of the product when
received by the buyer.
Ease of doing business
A range of factors, including the ease with which orders,
returns, credits, billing, and adjustments are handled.
Value-added services
Such features as packaging, which facilitates customer
handling, or other services such as prepricing and drop
shipments.
SOURCE: Reprinted with permission from Jonathon L. S. Byrnes, William C. Copacino, and Peter Metz, “Forge Service
into a Weapon with Logistics,” Transportation & Distribution, Presidential Issue 28 (September 1987): p. 46.
These facts, together with the extensive spread of just-in-time manufacturing, make it
clear that logistical service is important to organizational buyers.
Logistical service relates to the availability and delivery of products to the customer.
It comprises the series of sales-satisfying activities that begin when the customer places
the order and that end when the product is delivered. Responsive logistical service
satisfies customers and creates the opportunity for closer and more profitable buyerseller relationships.38 Logistical service includes whatever aspects of performance are
important to the business customer (Table 13.2). These service elements range from
delivery time to value-added services, and each of these elements can affect production
processes, final product output, costs, or all three.
Logistics Service Impacts on the Customer
Supplier logistical service translates into product availability. For a manufacturer to
produce or for a distributor to resell, industrial products must be available at the right
time, at the right place, and in usable condition. The longer the supplier’s delivery
time, the less available the product; the more inconsistent the delivery time, the less
available the product. For example, a reduction in the supplier’s delivery time permits a buyer to hold less inventory because needs can be met rapidly. The customer
38 Arun Sharma, Dhruv Grewal, and Michael Levy, “The Customer Satisfaction/Logistics Interface,” Journal of Business
Logistics 16 (2, 1995): p. 1.
348 Part IV
Formulating Business Marketing Strategy
reduces the risk that the production process will be interrupted. Consistent delivery
enables the buyer to program more effectively—or routinize—the purchasing process,
thus lowering buyer costs. Consistent delivery-cycle performance allows buyers to cut
their level of buffer or safety stock, thereby reducing inventory cost. However, for
many business products, such as those that are low in unit value and relatively standardized, the overriding concern is not inventory cost but simply having the products.
A malfunctioning $0.95 bearing could shut down a whole production line.
Determining the Level of Service
Buyers often rank logistics service right behind “quality” as a criterion for selecting a
vendor. However, not all products or all customers require the same level of logistical service. Many made-to-order products—such as heavy machinery—have relatively
low logistical service requirements. Others, such as replacement parts, components,
and subassemblies, require extremely demanding logistical performance. Similarly,
customers may be more or less responsive to varying levels of logistical service.
Profitable Levels of Service In developing a logistical service strategy, business
marketing strategists should assess the profit impact of the service options that they
provide to customers. In nearly all industries, firms provide numerous supply chain
services such as next-day delivery, customized handling, and specialized labeling.
However, few companies actually trace the true costs of specialized services and the
resulting effect on customer profitability (see Chapter 4).
To combat this unhealthy situation, some companies are now using cost-to-serve
analytics to address the problem—among them are Dow Chemical, Eastman Chemical, and Georgia-Pacific (GP). GP used total-delivered-cost analysis to improve the
performance of a major customer account.39 By incorporating cost-to-serve data into
the calculation of gross margin, GP’s supply chain team determined that the costs to
provide this customer with expedited transportation and distribution services were
significantly reducing the account’s profitability. In a top-to-top meeting with the
customer, GP used the data to expose the root causes of the high costs and poor
service, which included last-minute, uncoordinated promotional planning and purchasing across the customer’s major business units and the customer’s unwillingness
to share inventory levels and positioning. Customers, once confronted with the data,
are often willing to collaborate on ways to improve service, reduce costs, and restore
profitability.
To recap, service levels are developed by assessing customer service requirements. The sales and cost of various service levels are analyzed to find the service level
generating the highest profits. The needs of various customer segments dictate various logistical system configurations. For example, when logistical service is critical,
industrial distributors can provide the vital product availability, whereas customers
with less rigorous service demands can be served from factory inventories.
Logistics Impacts on Other Supply Chain Participants
A supplier’s logistical system directly affects a distributor’s ability to control cost
and service to end users. Delivery time influences not only the customer’s inventory
39 Remko Van Hoek, “When Good Customers Are Bad,” Harvard Business Review 83 (September 2005): p. 19.
Chapter 13
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349
requirements but also the operations of channel members. If a supplier provides
erratic delivery service to distributors, the distributor is forced to carry higher inventory in order to provide a satisfactory level of product availability to end users.
Inefficient logistics service to the distributors either increases distributor costs
(larger inventories) or creates shortages of the supplier’s products at the distributor
level. Neither result is good. In the first instance, distributor loyalty and marketing
efforts will suffer; in the second, end users will eventually change suppliers. When
Palm, Inc., developed the Palm Pilot, the firm created such an effective logistics system that its distributors in Latin America were able to offer the same level of aftersales service available in the United States, allowing Palm to reach sales exceeding
$250 million in Latin America in a short time frame.40 In some industries, distributors
are expanding their role in the logistics process, which makes them even more valuable to their suppliers and customers. In the chemical industry, for example, the role
of distributors is completely transforming as they offer logistics solutions—JIT delivery, repackaging, inventory management—to their customers.41 The logistics expertise distributors provide enables their vendors (manufacturers) to focus on their own
core competencies of production and marketing.
Business-to-Business Logistical
Management
The elements of logistics strategy are part of a system, and as such, each affects every
other element. The proper focus is the total-cost view. Although this section treats
the decisions on facilities, transportation, and inventory separately, these areas are so
intertwined that decisions in one area influence the others.
Logistical Facilities
The strategic development of a warehouse provides the business marketer with the
opportunity to increase the level of delivery service to buyers, reduce transportation
costs, or both. Business firms that distribute repair, maintenance, and operating supplies often find that the only way to achieve desired levels of delivery service is to
locate warehouses in key markets. The warehouse circumvents the need for premium
transportation (air freight) and costly order processing by keeping products readily
available in local markets.
Serving Other Supply Chain Members The nature of the business-to-business
(B2B) supply chain affects the warehousing requirements of a supplier. Manufacturers’
representatives do not hold inventory, but distributors do. When manufacturers’
reps are used, the supplier often requires a significant number of strategically located
warehouses. On the other hand, a supply chain using distributors offsets the need for
warehousing. Obviously, local warehousing by the distributor is a real service to the
supplier. A few well-located supplier warehouses may be all that is required to service
the distributors effectively.
40 Toby Gooley, “Service Stars,” Logistics (June 1999): p. 37.
41 Daniel J. McConville, “More Work for Chemical Distributors,” Distribution 95 (August 1996): p. 63.
350 Part IV
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Outsourcing the Warehousing Function Operating costs, service levels, and investment requirements are essential considerations regarding the type of warehouse
to use. The business firm may either operate its own warehouses or turn them over
to a “third party”—a company that specializes in performing warehousing services.
The advantages of third-party warehousing are flexibility, reduced assets, and professional management—the firm can increase or decrease its use of space in a given
market, move into or out of any market quickly, and enjoy an operation managed by
specialists. Third-party warehousing may sometimes supplement or replace distributors in a market.
Many third-party warehouses provide a variety of logistical services for their clients, including packaging, labeling, order processing, and some light assembly. Saddle
Creek Corporation, a third-party warehouse company based in Lakeland, Florida,
maintains warehouse facilities in a number of major markets. Clients can position inventories in all these markets while dealing with only one firm. Also, Saddle Creek
can link its computer with the suppliers’ computers to facilitate order processing
and inventory updating. The Saddle Creek warehouse also repackages products to
the end-user’s order, label, and arrange for local delivery. A business marketer can
ship standard products in bulk to the Saddle Creek warehouse—gaining transportation economies—and still enjoy excellent customer delivery service. The public or
contract warehouse is a feasible alternative to the distributor channel when the sales
function can be economically executed either with a direct sales force or with reps.
Transportation
Transportation is usually the largest single logistical expense, and with continually
rising fuel costs, its importance will probably increase. Typically, the transportation
decision involves evaluating and selecting both a mode of transportation and the individual carrier(s) that will ensure the best performance at the lowest cost. Mode refers
to the type of carrier—rail, truck, water, air, or some combination of the four. Individual carriers are evaluated on rates and delivery performance.42 The supply chain
view is important in selecting individual carriers. Carriers become an integral part
of the supply chain, and close relationships are important. One study found evidence
that carriers’ operating performance improved when they were more involved in the
relationship between buyer and seller.43 By further integrating carriers into the supply
chain, the entire supply chain can improve its competitive position. In this section we
consider (1) the role of transportation in industrial supply chains and (2) the criteria
for evaluating transportation options.
Transportation and Logistical Service A business marketer must be able to effectively move finished inventory between facilities, to channel intermediaries, and to
customers. The transportation system is the link that binds the logistical network together and ultimately results in timely delivery of products. Efficient warehousing does
not enhance customer service levels if transportation is inconsistent or inadequate.
42 For example, see James C. Johnson, Donald F. Wood, Danile L. Warlow, and Paul R. Murphy, Contemporary Logistics,
7th ed. (Upper Saddle River, NJ: Prentice Hall, 1998).
43 Julie Gentry, “The Role of Carriers in Buyer-Supplier Strategic Partnerships: A Supply Chain Management Approach,”
Journal of Business Logistics 17 (2, 1996): p. 52.
Chapter 13
Supply Chain Management
351
Effective transportation service may be used in combination with warehouse
facilities and inventory levels to generate the required customer service level, or it
may be used in place of them. Inventory maintained in a variety of market-positioned
warehouses can be consigned to one centralized warehouse when rapid transportation services exist to deliver products from the central location to business customers. Xerox is one company that uses premium airfreight service to offset the need for
high inventories and extensive warehouse locations. The decision on transportation
modes and particular carriers depends on the cost trade-offs and service capabilities
of each. It is interesting that in the age of next-day delivery and express airfreight
services, barges that weave their way through a maze of rivers, lakes, and channels
are thriving.44 A barge trip that takes 17 hours would take a train 4 hours and a truck
90 minutes for a similar trip. Although very slow (averaging 15 miles per hour), the
barge offers huge cost advantages compared with truck and rail. For products like
limestone, coal, farm products, and petroleum, the slow and unglamorous barge is an
effective logistics tool.
Transportation Performance Criteria Cost of service is the variable cost of moving products from origin to destination, including any terminal or accessory charges.